Big bank outlook: slow and steady
Bank earnings for Q2 2015 are up this week: JP Morgan Chase and Wells Fargo report their revenues and profits on Tuesday, July 14; Bank of America on Wednesday, July 15; and Goldman Sachs and Citigroup on Thursday, July 16.
Over the past several years, the biggest U.S. banks have been through financial crisis, massive bailouts and multi-billion-dollar lawsuits over their mortgage-lending and investment practices.
Now, banks face significantly more regulation and scrutiny than before, restricting how much risk they can take with their own and other people’s money. They have cut back on formerly lucrative proprietary trading as well as investment banking and deal-making activity.
All of which is keeping earnings potential low, says banking equity analyst Erik Oja at S&P Capital IQ. “It’s like it had a neutering effect on a wild animal,” says Oja. “They will certainly not be capable of the explosive growth they were capable of in a previous era. They will be much safer, much slower-growing.”
Oja predicts that the big banks will increase their profits in Q2 2015 by 2.2 percent over Q2 2014. That is after taking account of several huge legal settlements that banks paid out one year ago. Oja says the biggest potential legal liabilities are now largely behind the banks.
Karen Petrou at Federal Financial Analytics says the new regulatory regime, plus tighter underwriting standards, have helped shore up banks’ balance sheets. “The banks are sound,” says Petrou. “They have a lot more capital, they’re holding a lot more liquidity.”
The challenge for banks now, say analysts, is to increase profits in an environment of moderate domestic economic growth and volatility in overseas markets like Europe and China, and with U.S. borrowers still paying rock-bottom interest rates.
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