A major theme of 2014 has begun to emerge: strength in financials. The KBW Bank Index is up 2.8 percent so far this year and now at a five-year high.
The main reason for the move is that the outlook for financials is improving. Yes, they still need better loan growth and higher interest rates, and mortgage origination have slowed notably from last year (largely due to a decline in refinancing). Still, the underlying trends are still favorable:
- 1) Stronger capital and liquidity
- 2) Lower credit costs
- 3) Lower expenses
- 4) Net interest margin is OK
Lower expenses are a major theme for fourth quarter bank earnings. You can see it in Citigroup, where operating expenses dropped 5.9 percent. Yesterday Bank of America reported it had cut six percent of its branches, which led to a nine percent drop in staff.
Much has been made that trading profits have been down. That is certainly true, as Citi's fixed income trading was down 15 percent from a year ago. Mortgage origination were also notably lower.
Weak fixed income trading also hurt Goldman Sachs. There's been considerable speculation that new banking rules on risk-taking have already begun to take a bite out of trading in fixed income, currencies and commodities (FICC). That category was down 15 percent in Q4 from the same period a year ago, and 13 percent for all of 2013.
But here's the point about all this: it's only an issue at the big money center banks. Regional banks, for the most part, don't do this type of trading.
The saving grace appears to be equity underwriting...and by all indications it was a great year for initial public offerings (IPOs)! Goldman Sachs, for example, saw a 68 percent jump in IPO underwriting.