Everybody hates banks, except investors

Financial stocks have led the market all year, and Wall Street likes second-quarter earnings enough that the momentum could continue.

By Charley Blaine Jul 17, 2013 6:55PM
Bank sign © John Foxx, Stockbyte, Getty ImagesThe second-quarter earnings season has shifted into high gear, and it looks like one sector of the economy is making a big comeback: the sector everyone loves to hate -- drum roll, please -- banks in particular and financial stocks overall.

In fact, it's possible that financials may produce better profits in the second quarter than that sexy sector -- tech stocks. Unless, of course, Apple (AAPL) reports spectacular results after Tuesday's close.

A question -- at least in the short term -- is if the financial stocks are a bit frothy and may cause the market some weakness.

The resurgence of the financial sector represents a dramatic turnaround from the 2008 and 2009, when it looked like the domestic banking system might collapse.

The fact is, the big banks have produced okay results in their core businesses in the second quarter. But they have also been able to cut their loan-loss provisions -- their estimates of the loss they might incur -- substantially. Those cuts flow straight through to the bottom line.
Case in point: Bank of America (BAC). The banking giant reported Wednesday it had cut its loan-loss provision from $1.77 billion in the second quarter of 2012 to $1.21 billion, a 32% decline. That -- and a $1 billion decline in non-interest costs -- helped the company report earnings of $4.01 billion, or 32 cents a share, for the quarter. That's up from $2.46 billion a year ago, or 10 cents a share.

The bottom line, according to Howard Silverblatt, senior index analyst at Standard & Poor's, is that financial companies that are part of the Standard & Poor's 500 Index ($INX) look like that they will produce a "slight tick" higher in profits, compared with technology companies, for a second quarter in a row.

Likewise, Thomson Reuters is estimating $48.6 billion in profits for the group on revenue of $274.4 billion for S&P 500 financial companies. That's a 17.4% profit gain for the sector. Tech companies may show $46.6 billion in profits on $278.1 billion in revenue.

In the first quarter, financials showed about $50.4 billion in profits, compared with $48.5 billion for techs.

The improving position of financials has translated into stock gains. American Express (AXP) is up 33% this year. JPMorgan Chase (JPM) has gained 25%, and Goldman Sachs (GS) is up 26.6%. The Select Sector SPDR-Financial (XLF) exchange-traded fund is up 24.8%. The ETF tracks the financial sector of the S&P 500.

The technology sector has been weighed down by Apple, whose shares are down 38.7% since peaking last September. The sector's shares are up an aggregate of 1.4% since the Apple peak, Silverblatt says. Take out Apple, and the sector is up 14.6%.

Going forward, the market should move higher, but there's likely to be some weakness in the next few days, says Alec Young, global equity strategist at S&P Capital IQ.

A big reason is that traders have finally bought into Federal Reserve Chairman Ben Bernanke's assertion that the Fed may dial back some of its bond-buying over the next year. Interest rates are a different question and are not likely to rise any time soon, the Fed chairman told the House Financial Services Committee on Wednesday, repeating what he told the National Bureau of Economic Research last week.

The buy-in is why the market has recovered the losses it suffered between May 21 and June 24. The S&P 500 fell nearly 6% in those five weeks.

But now the issue is whether corporate earnings and the economy will be strong enough to push stocks higher. Noted banking analyst Richard Bove of Rafferty Capital Markets thinks the odds suggest the market could move higher. Housing, health-care, energy and capital expenditures are likely to be strong, he said Wednesday.

The market ended slightly higher on Wednesday. The S&P 500 ended up 5 points to 1,681. The Dow Jones industrials ($INDU) rose 19 points to 15,471, and the Nasdaq Composite Index ($COMPX) added 12 points to 3,610, its best finish since Sept. 29, 2000.

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10Comments
Jul 17, 2013 11:19PM
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I think if the Fed were channeling $85 billion of purchases per month through my business I could turn a nice profit margin too.  
Jul 18, 2013 6:55AM
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"Bernanke is an extremely inteligent man and I have confidence in his policies to stimulate growth, reduce the debt and capitalize corporations to expand earnings. Ben is far more intelligent than anybody blogging here..."

 

I read on waiting for the punch line, unless your whole post was the joke. There's over $1 quadrillion outstanding now in currencies, derivatives and debt contracts. If rates go up to just 1%, that's $10 TRILLION on $1,000,000,000,000,000. Without printing fake money, where does an economy with it's functional workforce destitute or dumpster diving, and it's administrative work-farce large, in-charge and addicted to texting and sports pools... going to raise that sort of cash each year? That said, if we END BEN AND QE TODAY... it would force every corrupt financial tyrannical nutcase into recoil, that would cause evaporation BECAUSE there is no viable economy to fall back to. We win by doing False Elitists in, using their own lame game. Bernanke-- any IDIOT could have dropped $85 billion a month from a plane flying across America and caused more economy, recovery and opportunity than he has.   

Jul 18, 2013 6:27AM
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of course  banks and the stock market are making  money  old  ben is feeding them are  money at  almost  o% example  when  i first got my  credit  in the  small print it use to  read interest rates could not go above a certain percentage of what the feds  rate  was.  so  how is it they can charge  anywhere's  from 9% to 24%   one card i  had  was 5.9% got a letter a few years back  if  i borrow  anything after  ascertain date  it would  be  12% ???  now a different  bank  owns the  card  smoke and mirrors'
Jul 17, 2013 10:00PM
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Bottom line... END BEN AND QE... and investors won't like banks either. Banks don't do America any good, they do bankers and their shareholders good. We the People have no more use for banks.
Jul 18, 2013 11:42AM
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Everybody hates Banks ? Why should they ? Major banks a criminal conspiracy to rob the American middle class and generations to come of all their money ! We love the Banks ! Investors BEWARE banks can and will collapse !  DIE BANK OF AMERICA DIE  ! TAKE YOUR MONEY AND RUN !
Jul 18, 2013 1:30AM
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I own bankers, they are and always have been a part of a balanced portfolio.

 

Some times you just hold your nose and do what you gotta do.

 

Yet ever since 07, I remind and recall Citi going from 52 to 3 in a matter of months.

 

Pay close attention out there boys and girls.

 

How soon some forget!

 

 

Jul 18, 2013 8:46AM
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Of banks it could be stated: There is a devil there is no doubt, but is he trying to get in us or trying to get out.
Jul 18, 2013 12:08AM
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The QE's have allowed Banks, big and small to leverage more and meet the Dodd Frank standards. Bernanke is an extremely inteligent man and I have confidence in his policies to stimulate growth, reduce the debt and capitalize corporations to expand earnings. Ben is far more intelligent than anybody blogging here, he has a firm understanding of inflation fears and will increase rates when the time is right. Without any help from Congress, Ben has a huge responsibility to stimulate growth and bring down the debt, so far so good, but it's like cooking chicken, take it off the grill to soon and it's a little raw, to late it's dry as a bone, Ben will know when the time is right to raise rates, keep your panties on.
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