Why banks failed to rally despite the earnings beats

A Citigroup Inc. trader works on the floor of the New York Stock Exchange
Michael Nagle | Bloomberg | Getty Images

Well, that was a relief.

Earnings for the first round of banks — JPMorgan, Wells Fargo, Citigroup, and PNC — came in above expectations.

Loan growth — a source of much of the anxiety, particularly in commercial — is still up mid-to-upper single digits year-over-year, but may be decelerating. Net interest is holding up. Expense control is good.

For JPMorgan and Citigroup, the beats came largely on stronger trading revenue, particularly in fixed income. JPM saw fixed income trading up 48 percent, with Citigroup up 35 percent.

That's good, but other banks like Wells Fargo and PNC do not have those trading operations. So loan growth — and fee growth — is a much more important component.

For Wells Fargo, total average loans rose a respectable 7 percent year-over-year.

All the banks that reported started the trading day up, but fell mostly flat mid-morning. What happened?

First, despite the beats, earnings were down across the board year-over-year.

Second, the "body language" on the conference calls seem to indicate that fourth-quarter earnings estimates may be too high, primarily due to potentially slower commercial loan growth. The jury is still out on this, but it correlates with everything we have been hearing.

After all, strong fixed-income trading results are nice for big money center banks like JPMorgan and Citigroup, but don't necessarily push stocks up much. They respond more to loan growth, which is respectable but hardly robust. After all, how much loan growth can you get with 2 percent GDP growth?

Third, Wells Fargo — which is down fractionally despite the beat — may be a special case. The sales scandal overshadowed the earnings beat. For instance, in September, the bank said customer visits with branch bankers were down 10 percent year-over-year, and consumer checking account openings were down 25 percent. Without being able to estimate the financial impact of the sales scandal, many are just staying away.

Finally, banks trading flat to weaker after JPMorgan reports is not that unusual. According to our partners at Kensho, when JPMorgan beats by 5 cents or more in the last 10 years, the SPDR S&P Bank ETF (KBE), a basket of bank stocks, on average trades down 1.5 percent the week after JPMorgan beats.