Bank profit leading S&P 500 as U.S. earnings growth sputters

GDP Growth

Expansion of America’s gross domestic product is forecast to slow to 2.05 percent in 2013 from 2.2 percent this year, according to the median estimate of economists surveyed by Bloomberg.

Financial companies’ revenue reached $35.56 per share last quarter, less than half the $80.65 high in 2007, weighed down by a compression in net interest margins, or the difference between what banks pay for deposits and charge for loans. The spread at U.S. banks with more than $15 billion in assets dropped to 3.29 percent last quarter from 3.85 percent in the first quarter of 2010, according to data from the Federal Reserve Bank of St. Louis.

Charles Bobrinskoy at Ariel Investments says that while regulation requiring higher capital cushions to protect against losses and more scrutiny by the government will constrict bank earnings growth, investors may be undervaluing their potential.

Priced In

“If there are new regulations on what businesses we can be in, if there are new regulations on leverage, anti-credit card fees, all of the things that Washington can do, it can be a negative,” Bobrinskoy, director of research at Ariel in Chicago, said in an Oct. 3 Bloomberg Television interview. “Those are all priced into the stocks, and I think from here we’ve got a lot of upside.”

Real-estate loans 90 days or more past due totaled $112.5 billion in the second quarter, according to the FDIC. While that’s more than twice as much as the end of 2008, nonperforming loans dropped 2 percent for the three months through June and 0.8 percent the quarter before, data show.

Shares of BB&T Corp. are 29 percent below the record in December 2006. The Winston-Salem, North Carolina, company beat second-quarter profit projections as deposits rose, net interest margin expanded and provisions for credit losses fell.

BB&T, which gets about half its operating income from the banking network for retail and small clients and the residential mortgage business, increasing return on common equity to 9.6 percent in the second quarter, and is forecast to expand earnings more than 30 percent for each of the next two reports.

Credit Quality

Analysts project Wells Fargo will boost earnings 20 percent in the third quarter and 21 percent the next, according to Bloomberg data. The company, which broke a profit record in 2011 and posted the highest second-quarter return on equity among the six largest banks, is 10 percent below its stock record.

“Credit quality -- the prime mover of bank fundamentals -- is poised to get better than average,” Chris Kotowski, a New York-based analyst with Oppenheimer & Co., wrote in a Sept. 25 note. He recommends investors overweight banks. “In its wake, steady loan growth and margins should follow.”

Credit card debt 90 days past due declined every quarter except one since June 2010, according to FDIC data. The $7.5 billion outstanding is less than half the amount at the start of that year.

“As the economy continues to improve, there should be a lot more improvement ahead for bank earnings,” said Timothy Ghriskey, the chief investment officer at Solaris Group LLC, which manages about $2 billion in Bedford Hills, New York. He spoke in an Oct. 3 phone interview. “Ultimately, stock prices follow earnings.”

Bloomberg News

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