Banks Rack Up Profits, but Investors Aren't Happy
Big banks have shored up their balance sheets and continue to rack up the profits, while also disappointing investors who are getting worried about growth.
With earnings season winding down for banks, the results have been stellar if you're just looking at the bottom line.
Some 90 percent of large institutions have topped analysts' estimates when looking solely at profits, which by itself should send shares rocketing skyward.
But 70 percent of those reporting have fallen short in the revenue category, kindling fears that big institutions in particular will have a tough time overcoming a slew of obstacles to profit growth.
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The first-quarter results "highlighted increased competition in a tough macro environment," analysts at Goldman Sachs said in a research note.
"Banks that saw the largest growth in loans and mortgage production had to concede the most on margins," the Goldman team added. "Until we see a pick-up in the economy, this trade is likely to persist with banks struggling for revenue growth."
The struggle comes even as investment banking seemingly rebounds, with direct capital markets revenue at $3 billion, the highest since 2007 and second highest ever, according to Dealogic.
But investors remain dissatisfied with earnings quality.
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Big banks, as measured by the KBW Bank Index, have fallen about 4 percent since earnings season began, though they were mostly higher Friday as profit-takers stepped in for bargains. The index has fallen more than 2.5 percent this week and its 6.7 percent gain this year has underperformed the S&P 500.
"Even downsized expectations for revenues were not low enough," Goldman said in its analysis. "This could continue to be a problem for banks in the quarters to come."
More trouble could be ahead.
The second quarter has started off slowly, with issuance, initial public offerings, and mergers and acquisitions lagging.
Economic signs also are troubling, with a weak March employment report and forecasts of interest rates, already at 2013 lows, likely dropping even more.
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Financial stocks began underperforming the market ... at the same time that the yield on the 10-year bond peaked," Fred Cannon, analyst at Keefe, Bruyette & Woods, said in a note. "A flattening yield curve and very low interest rates do have negative impacts on the intermediate earnings of banks and select brokers, and negative long-term impacts on life insurance earnings."
Cannon advised clients to avoid financials tied to rates.
Indeed, outside the immediate banking space, other companies within the financial space have been doing better. The sector overall is up 8.5 percent in 2013, about in line with the broader index's performance.
Capital One Financial, for instance, bounced back Friday after reporting blowout earnings Thursday and promising to increase the dividend by six times and to continue aggressive share buybacks.