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 (
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 (
). 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
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.
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%