Bank Earnings: Looking a Gift Horse in the Mouth
Posted on April 18th, 2010
Despite the pall cast over the stock market by the federal government’s charges against Goldman Sachs, the past week has been highlighted by above-expectations earnings reports from JP Morgan Chase and Citigroup. This earning strength has been greeted as a sign that the big banks have really turned things around for the better. However, perhaps a measure of healthy skepticism is appropriate.
Looking at the earnings reports a little more closely finds that the latest numbers have been heavily buoyed by trading gains. Meanwhile, more fundamental business lines (i.e., retail and lending) are ailing.
Haven’t we seen this movie before? Trading gains reflect the type of activity that can just as easily work against a firm, as was demonstrated during the financial crisis. In the current environment, these trading gains come from a period that has seen a roaring stock market recovery. Heavy trading gains in a bull market can simply be a sign of risk-taking and leverage — not the fundamentals on which sound banking is built.
There is an old investment adage — don’t mistake a bull market for brains. Until banks can show earnings strength based on fundamental banking business lines, they won’t have demonstrated that they are on the path to sustainable success.
This matters for bank rates because the more profitable banks are, the more they will pay in the form of savings account rates, money market rates, and CD rates to attract deposits. Thus far, the fact that bank rates have yet to respond to the improved profitability of some big banks may reflect the banking industry’s own doubts about how sustainable those earnings are.
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Tags: Earnings, Earnings Looking
Filed under Bank Rates |