T.The big banks tend to release their results at the beginning of the profitable season, which always makes it tempting to read a lot into them. Banks are, after all, the central players in a capitalist economy, so their assets should indicate something. However, bank receipts are complicated and often misleading when using the income statement as indicators of the remainder of the earnings season. To get a feel for what’s to come you need to dig a little deeper into the numbers, and when you do that with the results so far this morning there is an interesting message.
Goldman Sachs (GS), JPMorgan Chase (JPM) and Wells Fargo (WFC) All reported their results for the first quarter of 2021. Stocks all reacted differently to their respective results, which is encouraging in some ways, as it suggests that performance may depend on good old-fashioned concepts like efficiency and execution rather than systemic or sectoral factors. However, there was one issue that came up. Of course, three hardly encompass a sample size, but since these profits make up half of the major national banks, we can make an allowance here. There was a clear divide within this small group.
By far the best performer was Goldman, and that seems to be because it’s an investment bank. They make their living on Wall Street, with limited exposure on Main Street. JP Morgan and Wells Fargo, who do much more business with consumers and small businesses, were disappointed, if not so, with actual first quarter results. But before you go out and sell anything Main Street related to buy financial stocks, there are a few details you should consider from that revenue.
WFC beat expectations on its income statement, but its somewhat bleak outlook initially drove the stock down. Low interest rates will continue to weigh on companies like these, which are more reliant on traditional banking, but she and JP Morgan also pointed to another problem affecting stocks in general.
You said the demand for credit is low. This can be for one of two reasons, a good one and a bad one. The good reason is that businesses may be doing well and they may be cashless so they don’t have to borrow even with low interest rates. On the other hand, it could mean that companies are not investing in growth because they are not yet sure about the future. Fortunately, there was another clue that told us which of those it was.
A large part of the overperformance of JP Morgan and Wells Fargo resulted in particular from the release of loan loss provisions, USD 5.2 billion for JPM and USD 1.02 billion for WFC. They could only do this if the quarterly outages were well below expectations and they believe this trend will continue. In other words, while these loans may only appear as a temporary boost to profits, they actually indicate strong, profitable companies and potentially better business quality for the banks.
It would be all too easy to see as a bad sign the inequality between Goldman, who is flush with its trading and investment banking revenues, and the other two who have cautious prospects for their traditional banking operations. On the surface, this reinforces the argument that Wall Street is in a bubble unrelated to the real world, where people and businesses struggle. However, dig a little deeper and there will be a positive message. Companies have quickly recovered and are healthy again after a major shock.
Expectations were high this month. The P / Es of the S & P 500 were well above their historical averages, which could really only be justified by strong results. What we heard from banks this morning makes that outcome a little more likely and is encouraging for the market as a whole.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.