The Federal Reserve is putting more stress on gathering raw material. It has dramatically slowed the growth in money supply by shrinking its balance sheet. If this were the oil industry, the fact that there was less oil available and it cost more would be a crisis. It is no less a crisis if the raw material is money, not oil, and the industry is banking, not energy.
The manufacturing process in banking is yielding very positive results. However, it costs a great deal of money. The breakthroughs in big data, robotics, and artificial intelligence are uniquely suited to the banking industry. Thus, the improvements in the manufacturing process is a major plus for the industry.
Product quality is slipping very slightly. Loan losses are still near all-time record lows but they are creeping up. The outlook for a potential slowing in economic growth is increasing and there are even suggestions of a recession looming in late 2019. A recession would result in a sharp deterioration in loan quality and a steep drop in bank earnings.
Product sales are sleepy. The key product that banks sell is loans and they are not selling at a rapid clip at the moment. There are competitive pricing problems within the industry among banks, and from outside the industry from non-banks. Other than the consumer, most major borrowers are requiring less funding. This is true in both the real estate, and commercial and industrial lending groups.
This is not rocket science. Bank stocks are doing poorly because banking company raw material sources are drying up and the cost of the raw material is rising. Plus, product sales are under stress and product quality may be weakening ever so slightly.
The approach to analyzing banks just described here is virtually never used. Instead a consensus approach to bank analysis has emerged that is theoretically bankrupt. It may be doing even more harm to these stocks than the underlying fundamentals suggest. The consensus view is that interest rates and the yield curve are the key drivers in bank earnings; stock buybacks and financial engineering, in general, is critical to bank stock performance; and governmental regulations and litigation determine how a bank should be run.