1 )Bank results can be characterized by two issues: modest loan growth and low interest rates. Both are a problem for share prices.
Regional banks are continuing to report earnings, and the story is largely the same: loan growth is sluggish (4 to 7 percent year-over-year gains are typical), although net interest margin (the spread between what banks charge for loans versus what they pay for deposits) is dropping.
Atlanta, Georgia-based Suntrust Banks reported core earnings per share (EPS) above expectations (part of due to more more loan reserve releases), with revenues about in-line with expectations. They derive about two-thirds of revenue from consumer and mortgage banking, though it also has a commercial business that is about one-third of its earnings.
Average loan growth was up 7 percent year-over-year (1.8 percent quarter-over-quarter), but net interest margin dropped 8 basis points to 3.11 percent.
A similar story played out for North Carolina-based BB&T, which gets roughly two-thirds of its revenue from a combination of community banking, residential mortgages, auto loans, and property, casualty and health insurance. BB&T missed earnings estimates, partly due to an increase in mortgage and tax-related reserves. Net interest margin also declined 8 basis points, to 3.43 percent.
Bottom line: we need better loan growth (closer to 10 percent year over year rather than 4 to 7 percent) and higher interest rates to make loans a more profitable business. Still, there's an even bigger problem, which I outlined last week: banks overall are expensive. SunTrust trades at 13 times forward earnings; BB&T at 13.1 times forward earnings. This is roughly what many were trading at prior to the 2008 crisis, yet the money being earned is not back to those levels.