The Federal Reserves recent dovish verbiage has broken down interest rates since last November. With the 10 yr US Treasury yield falling 21.5% over the past 5 months. You can see this illustrated below.
These falling interest rates, which were instigated by the Fed, have had an adverse effect on bank stocks. A significant portion of their income is driven from interest rates. When rates drop so does interest income, having an adverse effect on banks’ bottom-line. KBE, a SPDR ETF tracking banking industry stocks, shows a 7.88% loss over the last 52 weeks compared to the 9% gain that the S&P 500 is exemplifying over the same time frame. You can see below that the spread between bank stocks return and the S&P 500 has grown in the past 52 weeks.
This slump for bank stock might have come to an end with JP Morgan Chase and Wells Fargo kicking off earnings for banks on a strong note.
JP Morgan Chase (JPM)
JPM beats earnings estimates by a tremendous amount surging the stock 5% in morning trading. They reported an EPS of $2.65 beating the 2.35 estimate by 13%, revenue was up 9% YoY and net income up 19% YoY. Most of this growth was driven by the investment banking side of the business. Debt underwriting fees was a significant driver for JPM with a large volume of businesses taking advantage of the “cheap” money that the Fed has extended to the economy through the credit markets. Traditional investment banking has also seen growth with businesses rushing to go public and cash out before the cash in the market dries up. With a record number of IPOs expect in 2019, IB segments for banks should see strong figures throughout this year. Client sentiment for JP Morgan Chase has turned very positive leading us as investors to conclude that we could see strong growth numbers throughout the year. JPM is currently sitting at a Zacks Ranking #4(Sell) but with these positive results and sentiments, EPS estimates should increase for the forthcoming quarter and push JPM to Zacks Rank #2 or 3 in the next day or two.
Wells Fargo & Co (WFC)
Wells Fargo posted $1.20 EPS, which was 11% above the estimated EPS of 1.08. The stock initially surged over 2% when the earnings were released but traded down 5% from its high today prompted by the earnings call. There was no update on WFC’s asset cap timeline, which has been plaguing the company for the last year. Unable to grow current operations has had an adverse effect on the stock’s valuation. The company also had slowed volume in deposits and loans, though they were able to boast a growing bottom-line. WFC - Zacks Rank #3
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