In the last two years, the fundamentals of commercial banking industry have been in a recovery phase despite Europe, Dodd-Frank and quantitative easing. The market is also reacting accordingly, as per a report by Oppenheimer, they are still in the relatively early stages and bank stocks still have a lot of room to work higher from here. Trading desks, which have been low for the past two years, report believes their fundamentals too, have bottomed.
Trading revenues have a seasonal pattern, with fourth quarter being the most weakest, accounting for about 20.5% of a full year revenues and on average down 11% from the third quarter. However, 2004 and 2006 were the exceptions.
Exclusive: David Einhorn’s FOF Has 270% Return From Revenue Share Agreement [In-Depth]
Greenlight Masters, the fund of funds managed by David Einhorn, returned 26.2% net of fees in 2020, outperforming the S&P 500, which returned 18.4% throughout the year. Q4 2020 hedge fund letters, conferences and more According to a copy of the firm's letter, which ValueWalk has been able to review, the dispersion of returns in Read More
The downtick in the fourth quarter gained further credence when JPMorgan Chase & Co. (NYSE:JPM) indicated in early-December that it expected its capital market revenues to be down about 15%-20% versus the third. But the report believes that trading revenues will probably end up doing better than that, basing their research on FINRA’s TRACE data on the dollar value of US corporate fixed income trading.
Probably A better Quarter for IB
Investment banking performance looks optimistic for the quarter and will be the third trillion-dollar quarter in the year, and the best year in aggregate since 20, as debt underwriting has been strong all year long. High yield underwriting is having its best quarter ever. Equity underwriting may not perform exceptionally well, but it is shaping up to be a roughly average post-crisis quarter. Announced M&A has been the most impressive this quarter, is trending to $868 billion in volume, the most since the second quarter of 2008. It remains to be seen, of course, whether or not this is just a temporary blip around trying to complete transactions before tax increases in 2013, but for any credible acquirer, money is as cheap as it is going to get.
Despite Improvements A Sluggish Quarter For Loan Volumes
As per the data from Fed, in December growth was 3.9% year over year rate, down slightly from the 5.3% in June. The report believes this to be a “slight lift from the accelerator rather than a tap on the brake.” The change comes mainly from the commercial side as consumer loans had just been inching up in any case. The drop in growth is mainly due to fiscal concerns and is expected to normalize, assuming a deal is reached. On the positive side, commercial real estate accounting for 20% of total loans is showing a gain on a year over year basis. Non-residential construction spending is up 31% from the low in January of 2011. Construction spending though flat, clearly has more room to go up than down from here. For December, home equity is the only loan segment in shrink mode.
Credit Quality Improving
Credit quality has made impressive improvements, since the mid-2009 lows. Basing their analysis on the credit card master trust early delinquency data, report says “clearly more of the improvement is behind us that in front of us, but still we believe that there is room for charge-offs to go down a bit further and stay somewhat below normal for the next year or two.”
Big Universal banks On Track
Core earnings for big universal banks, like Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC), Capital One Financial Corp. (NYSE:COF), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), Wells Fargo & Company (NYSE:WFC), Lazard Ltd (NYSE:LAZ) and U.S. Bancorp (NYSE:USB), are on track to register a jump from $74 billion in 2011 and $51 billion in 2010, to $100 billion in 2012. Even if, low interest rates and a slow economy delay the earnings growth, the amount is still impressive considering a time when balance sheets are barely growing, implying strong returns on capital.
To summarize, loans are growing modestly, fee income should be slightly better, and credit quality should continue to improve. “While all this is “well known” what we think is generally underappreciated is the earnings leverage it generates,” says the report from Oppenheimer.