When it comes to banks, bigger isn't always better


When it comes to banks, bigger isn't always better

Bobby Raines 10/14/2013

Earnings season is underway again and for the most part, there haven't been any big surprises, with the possible exception of a big quarterly loss reported by JP Morgan ( JPM ).

That company reported the first losing quarter since 2004, and the first losing quarter under CEO Jamie Dimon. The majority of the loss was due to $9.2 billion legal and settlement expenses and reserves, which suggests that JP Morgan needs to take a serious look at its operations if it anticipates that billion-dollar legal and regulatory settlements are going to continue for a while.

While I've written before about how JP Morgan's results can provide some guidance about what other banks' earnings may look like, that seems unlikely to be the case this time. Most banks simply haven't created the legal and regulatory headaches for themselves that JPM has.

In particular, I'd point to regional banks as a group that has avoided much of the legal problems faced by JP Morgan, and to a lesser extent, other too big to fail banks. In addition, I'd suggest that regional banks as a group are going to be less likely to face additional regulation in the future as the primary focus of both U.S. and international regulators seems to be lessening or eliminating too big to fail altogether.

That leaves regional banks free to focus on the business of banking while their larger counterparts spend time lobbying against and then dealing with new regulations.

One of the best-positioned regional banks is PNC Financial Services Group ( PNC ). The company is scheduled to report earnings on Oct. 16 and analysts currently expect the company to earn $1.62 per share on revenue of $3.88 billion. The company has beaten estimates for each of the last four quarters and I don't see any reason for this quarter to be much different.

Looking beyond this week into the near-term future, earnings should get some boost from rising interest rates, although slower mortgage lending activity is likely to moderate the gain in the near term.

Bull-put credit spreads can be a good way to trade stocks like PNC, where there seems to be very little downside, and some potential for gains.

Chart courtesy of stockcharts.com

For PNC, traders could consider a January 65/67.50 bull-put spread for a 40-cent credit. That's good for a 19.05% return, which is 72.42% on an annualized basis (for comparison purposes only). That position will return a full profit so long as the stock is above $67.50 at January expiration, giving it about 7% downside protection.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options

Referenced Stocks: JPM , PNC



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