In the first two full weeks of earnings (beginning Jan. 11), the majority of the banks weighed in with better-than-expected results. Despite those beats, favorable stock reactions have been tough to come by in these volatile markets as limited catalysts exist for the sector in the near term. Going into the fourth-quarter reporting period, just as in the third quarter, weak trading (primarily related to the fixed income, commodity, and currency business) and equity underwriting revenues was expected.
Expense control and advisory fees were expected to help offset the trading decline, and that mostly played out as expected for the money center banks. Concerns about loan loss reserve increases relating to the energy sector were realized at some of the banks, and others were less affected. The banks that have large exposure in their portfolios affirmed they were keeping a close eye on energy loan performance.
The regional banks had solid loan growth in the fourth quarter, stable to higher net interest margins and credit quality, and controlled expenses. The banking subsector that has reported to date has largely beat expectations.
Summary of Select Q4 Earnings Results
Fourth-quarter financial sector earnings estimates currently stand at -0.3%, an improvement from the -1.9% expected before bank earnings got underway on Jan. 14. Banks are the key contributor for the sector with 3.2% growth. Diversified financials follows and is the only other industry group with positive growth within financials as estimates were enhanced significantly in the past week. Diversified financials, which includes companies such as The Goldman Sachs Group Inc., American Express Co., Berkshire Hathaway Inc., and BlackRock Inc., has an expected growth rate of 1.5%.
Looking forward, bank management teams are focused on managing costs in a very uncertain interest rate environment. As long as the consumer remains resilient, loan growth and credit quality should result, though market volatility will impact investment banking businesses and a continued depression in the energy sector could result in increased loan loss provisions, hurting overall earnings growth. As a key indicator of the economic environment, we will keep a close eye on the sector as the earnings season unfolds.