US banks under pressure after earnings from Bank of America and Goldman Sachs
Bank of America has stunned pundits with stellar earnings, posting its largest yearly profit in almost 10 years. This is a clear indication that the bank has turned the corner and is in a substantially better position than it was during the 2008/9 financial crisis. So why is the US banking sector still under pressure?
For 2015, Bank of America managed to generate a profit of $15.89 billion – its best annual profit since 2006 and double last year’s figure. Investors will be heartened to know that the increase in profitability is due to a decrease in legal and regulatory fines, as well as continued cost-cutting efforts.
Here are some of the most important takeaways from Bank of America’s latest results:
- Q4 profit came in at $3.34 billion/$0.28 per share (contrast this with Q4 2014 profit of $3.05 billion/$0.25 per share)
- Consensus estimates by Thomson Reuters had Bank of America’s EPS at $0.26
- Adjusted revenues increased less than consensus estimates of $19.82 billion, to $19.76 billion
Despite the rise in earnings, Bank of America stocks closed down on Tuesday and are currently trading at around $13.70. As with all other financial and energy stocks, the big concern weighing on traders’ minds right now is the price of crude oil. Now that oil is firmly below the key $30 support level there is very little appetite for equities overall.
Goldman Sachs earnings partly assuage concerns
Like Bank of America, Goldman Sachs has also been hit hard by fines from the global financial crisis back in 2008/9. With over $5 billion in settlement fees, it is obvious why profits at Goldman Sachs are less than investors would like to see. As one of the biggest financial entities in the US banking system, Goldman Sachs was the last to release its financial results for Q4 2015. Net income declined by 71.8% for common shareholders, valued at $1.27 per share.
A year ago, earnings per share stood at $4.38. However, consensus estimates by analysts had Goldman Sachs generating $7.07 billion in revenues and adjusted earnings in the region of $3.53 per share. The fact that revenues for Q4 came in at $7.27 billion was a welcome boost for those going long on US banking stocks.
Unfortunately, the heavy restitution in the form of settlement fees has had a negative effect on earnings for the quarter to the tune of $1.5 billion post-taxes. As with all banking and financial institutions in the US, the weak price of crude oil is clawing away at any optimism.
Here are some important takeaways from the Goldman Sachs results:
- Annualised return on equity for Q4 2015 was 3%
- Earnings per common share for 2015 reported at $12.14
- The RMBS financial settlement degraded earnings per common share by $6.53 for 2015
- The RMBS financial settlement reduced earnings per common share by $3.41 for Q4 2015
- Goldman Sachs completed financial transactions valued at over $1 trillion in 2015
How to trade US bank stocks
With the quarterly and annual financial results for all the major US banks now in, traders will be scratching their heads wondering whether now is the time to invest in banking stocks. The fact of the matter is that in bearish markets you never try and catch a falling knife, because you’re going to get cut.
The financial results of Bank of America and Goldman Sachs offer interesting insights into the state of the US banking sector, but bank stocks are definitely not go-to investments at this juncture. The bigger picture is China weakness and plunging crude oil prices. Since major averages around the world are mirroring the performance of crude oil, the best advice is to hold off on purchases until the market bottoms out.
A reversal is likely to occur, but there is not enough clarity to ascertain when that is likely to happen. For now, analysts are advising traders and investors to wait until the end of January before buying into a bearish market.
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