Partway through earnings season, financial results from the major financial institutions haven’t been stellar. However I don’t think these stocks should be sold just because earnings didn’t smash through expectations.
Last week was a big week for big bank earnings reports, with Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) all reporting.
JPMorgan Chase’s earnings were weaker than expected, with profit dropping around $400 million compared to the same period in the previous year. At least some of this drop can be explained by high legal expenses, which rose from $857 million to $1.1 billion over the same period.
The bank paid $1 billion in penalties in November for wrongdoing in the foreign exchange market; however the Libor interest-rate-fixing scandal remains an unsettled issue since the bank hasn’t yet been hit with any penalties or been cleared of any wrongdoing.
The bank still grew net profit in 2014, with profits rising to $21.8 billion from $17.9 billion in 2013.
Wells Fargo’s earnings weren’t earth-shattering but they were solid. The company’s CFO spoke of the results in the earnings release.
Revenue increased as net interest income benefited from loan growth and the prudent deployment of our liquidity. Fee income remained strong and diversified. Credit quality continued to improve.
Wells Fargo’s profit climbed by more than 6% compared to the same quarter of last year, with revenue rising almost 4% over the same period.
Citigroup’s earnings report was the loser of the group. Profit fell 86% compared to the same quarter in 2013 after the company reported $3.5 billion in legal and restructuring expenses for the quarter. Considering that this number was just $1 billion the year before, it’s no surprise that profit fell so far short of the previous year’s levels and Wall Street expectations.
Bank of America’s major earnings headline also wasn’t a happy one. An 11% drop in year-over-year profit caught the attention of investors.
The bank paid $16 billion in fees related to mortgage misconduct that dates back to 2008 and the financial crisis. These penalties, combined with several others, took a huge bite out of the bank’s profit. Bank of America’s 2014 profit fell 60% from its 2013 profit, though revenue only fell 5% from $89.7 billion in 2013 to $85.1 billion in 2014.
On the bright side, Bank of America spent $393 million less on legal expenses than it did in the fourth quarter of 2013. The bank also cleared up and dealt with some major dark clouds that had been hanging overhead.
Cheap Oil Will Boost Banks
It seems like all I’ve been spouting is bad news. Why shouldn’t you sell big bank stocks?
As I said at the very top of this article, just because big bank earnings weren’t amazing doesn’t mean the stocks should be sold. Among other things, we think that the current environment of such cheap oil will significantly boost the big bank stocks.
Consumers have more money in their pockets to put into things like personal deposits, loans for cars, loans for houses, etc. Consumer confidence is also sitting at an all-time high. The additional disposable income and high consumer sentiment is also likely to drive homebuilding, which has positive ripple effects throughout the economy.
Despite failing to excite investors with their earnings reports, the big bank earnings news isn’t all bad. Major financial institutions put a lot of pain behind them in 2014, with many of them paying penalties to settle allegations and clear the dark clouds hanging overhead.
The outlook for big bank earnings in 2015 is bright.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
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