I wrote an update on the big four American banks by asset size (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo). I also looked at crypocurrencies, govcoin, regulations, fintech like Stripe and Square, and Power Corp.’s reorganization.
It’s published on Seeking Alpha and it’s probably available for free for a while. The first article is available here.
Summary
- Banks had fantastic results. The question is what follows?
- The pandemic hasn’t made the banks weaker; it’s made them stronger.
- The health of the banking system is akin to taking a blood sample of the economy.
- Banks have deposit problems. They have too much cash and are not making enough loans.
- Regulatory relief expected as banks are flush with capital. Buybacks and dividend raises are expected to follow successful Fed stress tests.
This is the opening of a front-page article in the WSJ on U.S. banks: “Everyone is clamoring for a piece of U.S. banks.” This is quite the sentiment change from my last article on the big four U.S. banks back in October 2020; nobody wanted a piece of them. But in stock market age, that was a really long time ago. At the time bank results and stocks were getting hammered. The mood was grim. Yet seven months later the banks are still standing and look better than ever. The bank stocks on track for what could be their best year on record compared with the S&P 500. The S&P Bank ETF (KBE) is now trading at about twice their pandemic lows and has risen 30.3% year to date, outpacing the 12.6% gain in the S&P 500. Despite the strong push, the banks remain cheap when compared to the rest of the market. Banks trade at around 13x their expected 2022 earnings, while the S&P 500 trades at more than 22x.
Banks’ Q1-2021 results have come and gone. I wanted to take the time to digest the results. With the backdrop of an improving US economy and strong results, the shares of JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) have rallied higher since my October 2020 article.
Today I wanted to provide an update and insights on the big four, the banking industry, Credit Suisse (NYSE:CS), regulations, fintech, and crypto.
I don’t track quarterly earnings like a hawk. But I particularly pay attention to bank results. They give you insights into the economy. They are alternative data. Just like Walmart and Home Depot gives you an idea of the health of consumer spending and the housing market. Bank results are like taking a blood sample of the economy. If the banks are not doing well, or worse they fail, it can have massive repercussions on the economy, like we have seen with the financial crisis of 2008-2009.
Thanks to heavy monetary fiscal stimulus, the doomsday scenario didn’t play out, at least at the moment of writing this. Bank results came in better than expected and are healthy.
Who would have thought that a year ago when we were wondering how bad the pandemic fallout will be? Who would have thought to bet on banks? The question is what follows? Investors are waiting to see how the banks will fare long term, as reserve releases are a temporary phenomenon.
But first, let’s resume how we got here?
The pandemic forced central banks in many nations to lower interest rates to rock bottom level.
Savers were not the only ones affected. In practice, interest rates on deposits cannot be lowered much beyond zero (negative rates may lead to withdrawal of deposits). Low interest rates reduce the interest spread (bank margins), the difference between the rate banks pay their creditors (deposits) and the rate they charge their customers (loans).
Because of the low interest rates environment, banks have been making their profit outside traditional credit and savings operations. They have focused on trading fees, asset management, and their capital market arms. When markets are chaotic, traders can still turn big profits. When the economy is flailing, investment bankers can help nervous companies raise cash or sell themselves. Deal-making activity has been strong, thanks to SPACs and a rich IPO market. Banks earn money on both sides of the SPAC equation—underwriting the IPOs and advising on the mergers. Capital markets activity has been a source of strength for banks throughout the crisis, helping them offset declines in revenue from core banking functions such as making loans.
Brian Langis 
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