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Are Big Banks Still Weak?

Written By Brian Hicks

Posted October 18, 2013

It’s a big time for big banks right now. Quarterly earnings have just been released, and they are interesting, to say the least.

Bank of America (NYSE: BAC) released its third quarter earnings on Wednesday, just before the government reached a deal on the shutdown. The bank netted $2.5 billion, which is just as much as it made a year ago. Share were up, which is a bit of surprise considering the political situation at the time.

bank of americaToday, JPMorgan (NYSE: JPM) released its earnings, and it was more than analysts expected. Revenue was $7.9 billion, a huge hike from the $5.3 billion last year. Shares came in at 44 cents, which is 4 cents more than analysts estimated.

Unfortunately, not all of the big banks made gains. Goldman Sach’s (NYSE: GS) revenues sank 22% since Q2 and 20% since last year. Shares were also lower by 2%. Revenue came in at $6.72 billion, even though analysts expected $7.2 billion.

Explaining Gains for Some and Losses for Others

It’s quite interesting that two major banks came in faring better than another. There must be a reason for it.

It seems as though some big banks, such as Bank of America and JPMorgan, have been pulling in money in an additional way. In addition to earnings, revenue is coming from loan reserves – money used to cushion the fall when there are losses. Since the foreclosure rate has decreased and the economy has improved, big banks believe it’s okay to use these reserves.

The main problem isn’t that the big banks are using the reserves; it’s that they are using too much. According to CNN Money, as much as 37% of the profits in the third quarter for banks such as JPMorgan and Bank of America came from loan reserves. Bank of America used as much as $1.4 billion – more than 50% of its bottom line. JPMorgan did the same, taking out $1.1 billion.

Pulling all of that money is masking the truth. Their revenue isn’t all profit. They are bring in billions from their reserves. As Moshe Orenbach, a bank analysts at Credit Suisse, told CNN Money:

“Everyone is looking at this. At some point this runs out.”

What happens when the reserves are too low or run out completely? Either the banks will experience some sort of miracle, in which people come in with tons of money to boost revenue, or they will take a huge hit. It’s likely they’ll take a huge hit.

Problems Coming Down the Pipeline

Let’s not forget the legal troubles going on with the big banks. When Bank of America was in a legal web, investors weren’t happy. The bank has finally started to gain their trust and confidence, with shares rising over 50% in the last year.

As Forbes points out, JPMorgan doesn’t seem to be suffering the same legal repercussions. It has seen a 22% increase in shares in 2013, but there’s always a chance there could be some backlash in the near future.

Rising interest rates are also affecting profitability. Americans have fallen in love with the low interest rates, and now that they are increasing, they are turning their backs on the housing market.

Fewer mortgages applications are coming through. In fact, mortgage lending has fallen by 20% since last year. Refinancing is also affected by the increasing interest rates, which is another source of profit for these banks.

Bank Investor Beware

As you can see, there are some issues coming to light that investors won’t be happy about in the next few months into 2014. Once the loan reserves run out, the real profits will be visible. The profits, compounded with recent legal troubles, may decrease investor confidence and trust.

It’s an especially a bad time right now to invest in the big banks, as they are all inflated. Buying high and selling low isn’t the way to get the best returns from your investments.

It’s best to wait right now. Don’t dive into the big banks thinking they are about to rebound because the government has reopened and the economy is about to flourish. It’s probably better to start looking at the companies doing business with the big banks, as they are the ones producing the profits the banks are receiving.


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