The banking sector has taken a significant hit since the beginning of the year, with both the SPDR S&P Bank ETF and SPDR S&P Regional Banking falling 9% in the first nine weeks of 2016. Headline fundamentals have not looked so bad, but it’s forward looking guidance that has investors worried.
The financial sector as a whole only came in with meager earnings per share growth of 1.3% in the fourth quarter 2015, with markedly higher revenues of 4.9%. This is a 180-degree turn from the overall trend seen in the last two years, in which top-line growth has visibly lagged behind bottom-line growth. The banking industry drove results in the fourth quarter, with year-over-year profit growth of 11.3%, but much lower revenue growth of 2.6%. Regional banks had a meager showing of 2% growth for both of those metrics. The weakest link, on the other hand, has been capital markets, which includes large investment banks Goldman Sachs and Morgan Stanley. That industry saw earnings-per-share declines of 7.6% with sales falling 3.2%. The six biggest U.S. banks grew a whopping 19% on the bottom-line, but only 2% on the top-line (see “Big bank blues”).
A variety of concerns had bank investors on edge during the last couple of quarters, and many of those worries were reiterated by bank CEOs themselves. Troubles in China, plummeting oil prices and uncertainty about future increases in interest rates are all contributing to volatility around these names.
Fixed income, currency and commodity trading remain a huge issue for big banks. According to research firm Coalition Development, the world’s 12 largest banks saw sales for those sectors fall 9% in 2015, while credit products slumped 32%. Analysts are expecting that trend to continue into the new year, with first quarter 2016 estimated to show a roughly 15% decrease in those sectors. Commodities of course were a weak spot, mainly due to slow business in metals and mining, and a return to more normalized turnover in the energy markets after the prior year’s surge. A slew of regulatory changes also took their toll.
And now there are fresh new concerns about how badly the energy crisis is hitting banks. JPMorgan Chase (JPM) voiced these concerns at their annual investors’ day on Feb. 23. The bank now reports losses on loans made to energy companies could total nearly $3 billion. Defaults from mining and materials could tack on another $350 million to that figure. This scenario will only come to fruition if oil prices remain at near their recent lows for the next 18 months. It is assumed that other global banks will follow up with similar announcements.
All of this turmoil has led some of the big banks to announce sizeable workforce reductions, starting with Citigroup (C) late last year. On Dec. 18, the bank announced plans to cut at least 2,000 jobs throughout 2016 as it works to restructure its business. Following suit was Goldman Sachs (GS) and Bank of America (BAC) earlier this year. Goldman will eliminate 10% of traders and salespeople in its fixed-income business, more than their typical annual cut. Bank of America also cut 150 trading and investment-banking employees at the beginning of the year in an attempt to trim expenses.
Despite all of the bad news, there are some bright spots. Volatile markets have of course been good for equity trading revenues, including equity derivatives, cash equities, prime hedge fund services and futures and options, with revenues rising 10% in these areas. Unfortunately that hasn’t been good enough at this point to offset fixed income, currency and commodity weakness. There has also been an increase in lending, with banks such as JPM reporting an increase in total loans, average deposits and credit card issuances. Wells Fargo, the country’s largest mortgage lender, has received a boost from the sturdy housing market. Regional banks have seen their stocks tank earlier in the year, but with less global exposure they should fair better than their multinational counterparts.