US Bank Earnings – Q4 Bonanza
20 January 2017 by Eoin Walsh
The major US banks have now reported earnings for Q4, and it’s obvious that they were big early recipients of the so called “sugar rush” from president-elect Trump’s fiscal policy plans and bank-friendly regulatory reversals. Within the banks it was the Capital Markets units that were the big winners, with fixed income sales and trading revenue in particular achieving very strong gains. To briefly touch on some numbers, Citigroup reported a 36% increase in revenues from its fixed income division, JPMorgan and Bank of America reported 31% and 12% gains respectively, while specialist traders did even better; Goldman Sachs reported a 78% increase and Morgan Stanley said that revenues almost tripled in Q4 compared to the prior year period.
However, we should highlight that these numbers are in comparison to what was a weak period for banks in Q4 ’15 so it was an easy target to beat. Having said that, on a full year basis, MS, Citigroup and GS all posted higher revenue numbers in 2015 than 2016, while all five banks continued to cut expenses and, other than JPM, cut staff as well – Wall Street has now lost over 500,000 jobs since the financial crisis. The big question for many investors, particularly equity investors given the 20-30% stock price rally since the US election, is can these impressive results be repeated during 2017, and how long will the trading boom last? A lot of this will depend on Trump’s policies and markets are rightly nervous about applying multi-yield multiples to one quarter of earnings, but a review of Dodd Frank legislation would certainly help.
Another interesting development was the level of provisions. Remember, this time last year, with the US energy sector in turmoil, and default predictions sky high (bond trading levels extrapolated to a 90% default rate at one stage), the US banks were all expected to take big losses because of their exposure, so their underwriting standards and risk mitigation policies were in the spotlight. We already knew from Q3 earnings that banks were benefiting from reserve releases and this trend has continued, with provisions for the major banks being approx. $1bn lower than expected by analysts.
This time last year, the banks went to great lengths to differentiate their loan books from the high yield bond markets, telling us that their energy and related exposures were materially smaller, better covered and more diversified. This has indeed been the case as defaults from bonds in the energy sector have been over 20% but the big US banks were actually able to lower provisions by the 4th quarter. We have maintained for a long time that risk taking post-crisis would be materially better than before.
The obvious question now is what should we expect from the European banks when they begin reporting shortly? We probably don’t expect them to turn in numbers quite as strong as the big US names, however, they should also have benefited from the more favourable conditions in Q4, especially those banks with big trading arms and global operations, such as Barclays, Deutsche Bank and Credit Suisse. However, they have lost market share to the Americans and it has already been reported that Credit Suisse has guided analysts against expecting similar results, so maybe we should be braced for numbers that underwhelm the rising expectations. From a debt perspective though, it will be interesting to see if the capital accretion continues or if distributions become larger.
This time last year we were facing an energy-led sell off for US banks, while the actual solvency of the European banking system was being called into question – another false alarm, but it probably won’t be the last!
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