Bank stocks have been notable laggards in recent quarters, with market participants preferring the faster growing technology stocks to these seemingly boring companies. But as the turmoil of the last few days’ market action shows, the unwinding of the overcrowded trades in technology and other momentum stocks can get messy very easily.
Banks are boring, but they have a lot going for them. Granted, bank margins have been held down, and low interest rates and loan portfolios haven’t been growing as fast as many of us would like. With respect to loan growth, lending to businesses (broadly referred to as ‘C&I,’ or commercial and industry loans) is healthy enough, with the moderate pace in consumer loans more likely a reflection of stricter and more prudent standards at the banks. And margins should start moving higher with the recent uptrend in interest rates. Bank management teams have become very good at cost controls, and they pay out stable and growing dividends.
Banks earnings aren’t great, but they are good enough and reasonably stable, unless you see the U.S. economy heading toward a recession. We see all of this in the results from JPMorgan (JPM), Wells Fargo (WFC), and Citigroup (C), which kicked-off the Q3 earnings season for the Finance sector on Friday. Q3 earnings for these three major banks are +16.1% from the same period last year on +3.4% higher revenues. All in all, the trading and mortgage banking revenues were weak and investment banking was flat, with most of the growth coming from consumer banking and effective cost controls.
Finance Sector Scorecard (as of Friday, October 12)
We now have Q3 results from four of the 97 Finance sector companies in the S&P 500 index. Keep in mind, however, that these four companies account for 21.5% of the sector’s total market capitalization in the index.
Total earnings for these four Finance companies are up +16.1% from the same period last year on +3.4% higher revenue growth, with 75% beating EPS and revenue estimates. The comparison charts below put the results thus far in a historical context:
