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By Nicholas
Jasinski | Wednesday, April 14 Bank
On It. First-quarter
earnings season kicked off today with results from JPMorgan
Chase, Goldman Sachs, and Wells
Fargo. Goldman was the biggest winner, beating
consensus earnings estimates by 82% and posting a
record quarterly profit. Its stock
rose 2.3% today, lifting the Dow Jones Industrial Average to a 0.2% gain. The S&P
500 slipped 0.4% today, and the Nasdaq Composite lost 1%. JPMorgan
also had a
very profitable quarter, but a large chunk of its income was only
on paper. The bank added back reserves it had set aside to cover expected
losses on its loan portfolio during the pandemic last year. With the economy
improving faster than was expected at the time and fewer borrowers
appearing in danger of default, JPMorgan can now reclaim those reserves.
Accounting rules require them to be recognized as a loss when set aside, and
they get added to income when reduced. That
technicality tempered what was an otherwise strong quarterly result for the
nation's biggest bank, and JPMorgan stock lost 1.9% today. Wells
Fargo's shares rallied 5.5% after
its report this morning, with its results beating a lower bar than
those Goldman or JPMorgan faced. Earnings were helped by a steeper
yield curve, which affects banks' core business of borrowing short to lend
long. When long-term rates exceed short term ones by a wider margin, their
profits rise. For example,
a bank might take on liabilities in the form of savings account deposits, and
pay its customers 0.1% or less in the form of interest these days.
It then lends out that capital to businesses and individuals in the form of
commercial loans, mortgages, and more at 3% or higher. Those longer-term
rates have been rising lately as yields in the bond market have climbed,
while Federal Reserve keeps
short-term rates near zero. That expanded banks' net interest margins in the
first quarter, boosting profits, and is likely to continue doing so this
year. But the
first quarter was also a busy period for banks' Wall Street-focused
divisions. Trading volatility and volume was high, earning brokerage
commissions. And the market for initial public offerings and special purpose
acquisition companies boomed in the first quarter, bringing in underwriting
fees. Goldman and JPMorgan saw big profits at their investment banking and
trading divisions. The bull
case on banks going forward is that as the economy continues to recover,
demand for loans will pick up and credit conditions will continue to improve.
Valuations in the sector also don't appear to be as challenging as most other
pockets of the market. And for investors worried about the impact of rising
bond yields or interest rates on their portfolios, banks are particular
beneficiaries of that trend. Bank of
America and Citigroup report tomorrow, followed by Morgan Stanley on
Friday. Barron's Carleton
English will be busy covering them all. Finally,
news came today that the notorious fraudster Bernie
Madoff died in prison at
the age of 82. Once a Wall Street mainstay and a former chairman of
the Nasdaq Stock Market, Madoff pled guilty in 2009 to running his
investment firm as a Ponzi scheme, having defrauded his investors of some $17
billion. He had served the first decade of a 150-year sentence. Barron’s was one of the first to question Madoff’s
practices and lack of transparency. Read our 2001 article here. |
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