Banks traded down on Friday, July 14, despite good earnings.
Banks have begun reporting earnings, and all four banks—JPMorgan, Citigroup, Wells Fargo and PNC—beat earnings expectations for the second quarter despite falling bond-trading revenues. The KBW Nasdaq bank index dropped 1.6 percent on Friday after declining as much as 2 percent, and the S&P 500 Financials Index is also down 1.1 percent.
JPMorgan’s strong earnings report was due to higher credit card spending and investment banking fees. It reported $1.82 net income per share compared to the expected $1.58 per share. But mortgage banking and equities were low during the second quarter. The bank is still the biggest U.S. bank in terms of assets, with an increase of about 4 percent from last year. However, the bank closed down almost 1 percent, TheStreet reports.
Citigroup credited its high earnings from consumer banking and institutional client groups, and reported its best investment banking quarter so far in seven years. It beat expectations with $1.28 per share compared to the expected $1.22 per share. Revenue was also higher, at $17.9 billion compared to estimates of $17.4 billion. However, its trading desk affected the bank’s profit, and its stock traded down 0.5 percent.
Profit increased for Wells Fargo, as it finally recovered from a fake-accounts scandal. Earnings per share was $1.07 compared to the expected $1.01. Revenue also rose but fell short of revenue expectations. It missed the expected $22.47 billion and reported $22.17 billion. Wells Fargo stock dropped 1.1 percent at closing on Friday.
PNC’s net interest income jumped 5 percent as deposit costs climbed less than the yields. The bank also expressed its plans to expand its corporate lending business, and maintained its growth plan for its loan book. However, the bank’s shares fell 0.4 percent during afternoon trading at $126.78.
“Bank stocks were due for a breather,” Shannon Stemm, analyst at Edward Jones, told Reuters. “They had a lot of optimism priced into the shares as investors got excited about rising interest rates and the prospect for regulatory reform. However, the fundamental picture is more mixed.”
Some analysts point to investors’ cautious behavior due to their rising expectations since Donald Trump’s election, the Financial Times reports.
According to James Chappell, analyst at Berenberg, bank shares are now looking “expensive” after a strong rally, since the Federal Reserve gave the go signal for banks to make big cash distributions to shareholders since the financial crisis.
Investors have also been investing heavily into Financial Select Sector SDPR, an exchange-traded fund that tracks the industry.
Ahead of these earnings report, Wall Street had underestimated the banks’ earnings and expecting them to report a weak quarter, TheStreet reports.
The decline, however, has not caused panic. Ratings firm CFRA is maintaining its buy ratings for JPMorgan and Wells Fargo, as well as raised the target price for both stock of $2.
“A lot of environment around them is still pretty good just fundamentally,” Jim Paulsen, chief investment strategist at The Leuthold Group, told CNBC. “There’s borrowing and lending going on again. With the stock market going to new highs, I think it’s going to stoke a little new activity.”
According to CNBC, the stocks are falling due to fundamental and seasonal factors. Based on economic data on Friday, retail sales did not meet estimates, and because of this Treasury bond yields were lower. This means that banks may have to deal with lower interest rates, and therefore have lower chances of increasing their profits.
This may also be the reason Bank of America, second-largest U.S. bank in terms of assets, fell the most, with shares sliding as much as 3.3 percent. The bank has a large retail business that relies heavily on interest rates, FT reports.
As for seasonal factors, banks tend to trade high in the month before JPMorgan makes its earnings report, and then trade slightly lower on the day of the report and then generally flat in the next month.