Here's What Kept Bank Stocks Down This Week
July 20 2017 - 2:10PM
Dow Jones News
By Liz Hoffman
The five large U.S. banks with a major Wall Street presence beat
analysts' earnings expectations over the past week, sometimes by a
wide margin.
Yet with one exception, the banks' shares all sold off in
response to the results. The KBW Nasdaq Bank Index has dropped 2%
since earnings season started last Friday, compared with a 1% gain
in the S&P 500.
Behind the disappointment: Bank stocks have run up significantly
since the U.S. presidential election and found new momentum at the
end of the second quarter, showing many investors already had
priced in strong second-quarter results.
It was hard to live up to the billing. Interest rates have been
only a mixed blessing. Short-term rates going up since last fall
helps lenders, while the 10-year Treasury yield declining hurts
them.
Then there is the Brexit hangover. Trading desks, especially in
all-important fixed-income divisions, reported declines that shook
the belief that trading had started a sustained rebound after years
of slumping. Making matters worse: The year-ago period featured the
U.K. Brexit vote, which led to a brief surge of activity and made
this year's second quarter look tame by comparison.
In some cases, the drivers for banks' earnings wins weren't the
superstar divisions like trading, but rather utility players unused
to the limelight. This unlikely cast of heroes, from private equity
to asset management and commercial lending, provided some boosts,
but they weren't enough to move the stocks higher.
Here are highlights and lowlights from the big banks' earnings
reports:
J.P. Morgan Chase: The largest bank in the country reported its
highest quarterly net income ever, $7 billion, but investors still
headed for the exits after last Friday's report because the bank
trimmed its outlook for the second half of the year. Trading
revenue was down 14% across bond and stock trading, while the
commercial bank and asset-management arm both posted record profits
and double-digit increases over a year earlier.
Goldman Sachs: Fixed-income revenue plummeted 40%, a dismal showing for Goldman's vaunted traders. Commodities, the business that vaulted Chief Executive Lloyd Blankfein to a corner office, posted its worst quarter ever as Goldman struggled to hedge its exposures.
The firm did get a boost from private-equity investments.
Revenue from Goldman's roughly $23 billion portfolio of equity
stakes rose 88%, as some companies were sold and others were
re-marked amid generally rising stock prices.
Bank of America: Lending at the Charlotte, N.C., bank didn't
grow as much as some hoped. The nation's second-biggest lender
posted a surprise decline in net interest income, after lowering
guidance in recent weeks. The metric, which executives initially
said would rise about $150 million, fell by $72 million.
Meanwhile, investment banking fees from merger advice and
underwriting rose 9%. Merger fees hit a record as Bank of America
leapfrogged J.P. Morgan and Morgan Stanley in the M&A
rankings.
Citigroup: Credit cards continued to weigh on the global bank.
The New York firm run by CEO Michael Corbat added more credit
losses than revenue from card usage, and raised its forecast for
delinquencies on cards it manages for retailers. Overall, net
income in its consumer-banking business fell 12%. The bank expects
those results to turn around later this year. Picking up the slack:
investment banking. Revenue rose 22% there as Citigroup slid into
second place in Dealogic's M&A rankings, its highest at this
point in the year since at least 2008.
Morgan Stanley: The Wall Street firm run by CEO James Gorman was
the exception this quarter. It saw broad-based gains across its
business. Stock traders and debt traders posted the smallest
year-over-year declines of any big bank; capital-markets bankers
also provided a big boost, while wealth management set records in
several categories.
Morgan Stanley was also the only big bank whose shares rose
after its announcement.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 20, 2017 14:55 ET (18:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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