“Bank Stocks Gain in Triumph of Low Expectations.” At least that’s what Aaron Kuriloff of The Wall Street Journal calls the unexpected jump in major banking stocks. The Big Four banks — JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) — all reported their first quarter results last week, with all meeting or exceeding earnings forecasts. Ordinarily, such earnings beats usually results in an appreciable move up in the financial markets. The difference here, however, is the quality of those earnings. If standards are artificially reduced, and companies’ financials beat those reduced standards, is it really an earnings beat?
The question is further developed when we consider revenue performance. Here, all but one — Wells Fargo providing the exception — saw a fairly significant sales decline against the prior year quarter, with losses averaging 7.6%. Citigroup led the losses with a year-over-year decline of 11%. That was more or less expected considering that their management team disclosed disappointing revenue from their investment and trading activities. The primary reason why WFC bucked the trend is that they are the leader in mortgage lending. In addition, several of their branches are located in prime metropolitan areas.
As for the other three banks, one of the consistent themes is sales declines from non-interest income, or income generated through financial services or investment activities. Non-interest income is anything outside of net interest income, which is income derived from assets on a bank’s balance sheet. As things stand now, banks are gaining in terms of net-interest income, but as a whole, their non-interest income is an ongoing liability.
What that tells us is that major banks are on a very precarious course. Essentially, the only form of sales growth is coming via passive income. However, that situation is highly dependent upon a stable economy. If the country rolls back into a recession, that may force average Americans to dig into their savings to make ends meet, effectively clipping interest income potential.
When it comes to generating revenue from financing activities, there are less and less buyers. That’s clearly reflected in the technicals. For example, the chart of the exchange-traded fund Financials SPDR (NYSEARCA:XLF) shows a bearish trend channel that started in August of last year. Coincidentally, or not coincidentally as the case may be, the bearish channel started right as the time the markets were collapsing.
Worse yet, every success rally in the bearish trend channel has peaked at a lower and lower price. Subsequently, peak lows are also occurring at lower price points. Traders see no reason to “risk it all” in the financial sector, as demonstrate by declining volume levels. With revenue doing so poorly at major banks, it’s only a matter of time before something gives.
For those that refuse to see the bigger picture, I can only say to enjoy the bank run — while it lasts!