Bank results are on a roll, and it's picking up speed. On Wednesday, Bank of America's earnings were a bit light, yet they still managed to vault over Wall Street's bar. On a related note, PNC Bank, US Bancorp, and even Northern Trust were all better than expected.
With PNC and USB, we are now getting results from big regional banks. Unlike Wells Fargo, which is largely a consumer banking company, or Comerica, which is largely a commercial bank, many of the regional names are mixes of retail and corporate banking.
PNC is a good example of a diversified revenue mix:
Retail Banking 38 percent
Corporate Banking 34 percent
Residential Mortgage 7 percent
Other (asset mgmt, etc) 21 percent
The results were mixed: revenue was slightly lower, and a flatter yield curve produced net interest margin of 3.12 percent (the Street is obsessed with this figure), but loan growth was decent, fees were good, and expenses seemed to be about as expected. The outlook is for modest loan growth in the third quarter, and that's still a problem.
US Bancorp, another super-regional based in Minneapolis, with a slightly higher consumer focus, also reported strong results. The bank earns almost 45 percent of its revenues from fee income, which was up 6 percent sequentially. Those fees are showing respectable growth:
Mortgage banking up 17.8 percent
Credit/debit card up 8.4 percent
Merchant processing up 7.9 percent
The problem with the banks is this: they are getting expensive!
People buy banks in an improving economy because it's double levered: you get higher rates and higher loans. However, we already arrived at an expensive price, without actual growth.
While the biggest banks are still relatively cheap, regional banks are no bargains! PNC is trading around 12 to 13 times forward earnings, USB is at 13-14 times, some like Comerica are even higher, almost 16. These are close to pre-financial crisis multiples.
The problem is, people are are paying more to get less. They are making less money on a dollar to dollar basis, but they are being valued the same. So the market is either over-optimistic about the recovery, or the multiples have to correct. What we need is very simple: either an increase in loan growth, or higher interest rates.
1) loan growth. For the most part, banks are talking roughly 4 to 6 percent loan growth year over year, or roughly 1 to 2 percent growth quarter over quarter.
Loan growth at USB was respectable, up 1.9 percent sequentially, while PNC reported 1.3 percent growth. Is that good enough? It's decent, but it needs to get better, perhaps somewhere in the range of 8 to 10 percent annually, and 2 percent plus quarter over quarter, at least.
2) higher rates. Banks need short-term rates to rise, so they can charge more for things like adjustable rate mortgages. Those are the kind they keep on the books. No one is keeping 30-year loans at 4 percent on their books.
They don't expect much: PNC CEo William Demchak sai he expects a "continuation of the low interest rate environment."
Bottom line: fundamentals need to catch up with valuations.
1) Despite despite low trading volumes, Charles Schwab is shining as a gatherer of assets. The broker earned $11.5 billion in net new assets in June and $22.7 billion during the second quarter, the highest June in their history. Clients opened 242,000 new brokerage accounts during the quarter, and we ended the quarter serving 9.3 million active brokerage accounts and 950,000 banking accounts, up 3 percentand 4 percent, respectively, from year-earlier levels.
The same is happening with Blackrock: the iShares juggernaut saw $13.1 billion in long-term net inflows!
2) Intel opened trading at a 10-year high on strength in the corporate PC cycle.