Bank earnings are down, but check out those balance sheets
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If you follow the news even a little, the factors dragging on bank earnings will sound very familiar: The stock market had an ugly start to the year. There were concerns about global growth, including fears about China’s slowdown. Oil prices were very low, among other headwinds.
“Many people did go to the sidelines, both companies looking to raise capital, as well as individual investors, as well institutional investors because of this uncertainty and risk,” said Gerard Cassidy, managing director and head of bank equity research at RBC Capital Markets.
Lower activity — for example, less trading or fewer companies going public — means lower fees for banks.
However, not all banks were equally impacted. Net income at Goldman Sachs tumbled 60 percent from a year ago; the same category at J.P. Morgan Chase dropped only six percent.
“The earnings are down on a year-over-year basis, but the investors are looking to the silver lining that they weren’t as bad as expected,” added Cassidy.
Additionally, while bank results were “lousy” in this quarter when it came to earnings, they were “great when it comes to stability,” said Mike Mayo, managing director at CLSA Americas.
“That’s the flip side of regulation,” he explained. “On the one hand, regulation has depressed the results for the banks, on the other hand, regulation has strengthened the foundation of banks. There’s no question that the lower returns at banks is to some degree a consequence of the regulators’ desire for banks to de-risk and de-lever.”
Even if returns weren’t spectacular, the banks were still profitable this quarter, said David Hilder, a senior bank analyst at Drexel Hamilton.
“It’s all a matter of perspective,” he said.
Moreover, he noted banks’ strong loan growth, “especially strong in commercial lending, which I think is a very good sign for the U.S. economy. When U.S. businesses are borrowing money, that means that they’re borrowing to build inventories or build plants or hire people.”
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