Corporate Profits Fall Most Since 2008

03/28/2016 12:20 pm EST


Michael Berger

President & Founder,

Although fourth quarter gross domestic product was revised higher, corporate profits declined the most since late 2008 and Michael Berger of, highlights the industries that are most levered to this decline.

Even though the latest update on the performance of the United States economy in the fourth quarter seems encouraging, there is reason for concern.

On Friday, fourth quarter gross domestic product (GDP) was revised to 1.4% (annualized rate) from a previously estimated 1% and the adjustment was related to stronger than expected consumer spending.

Concerns go Beyond the Headline Number

Our concerns go beyond the headline number and are related to corporate profits falling 11.5% when compared to the same period last year.

The drop in corporate profits is the largest since a 31% decline at the end of 2008 during the peak of the financial crisis. According to the Commerce Department, pre-tax earnings fell by 3.1% during 2015, the largest decrease in seven years.

Energy Sector Accounts for Largest Drop in Profits

Although this news seems concerning, much of the weakness stems from the petroleum and coal industries. The collapse in energy prices caused profits in these industries to fall by approximately 75% during 2015.

Another factor that affected these numbers was a $20.8 billion penalty payment by BP p.l.c. (BP) to settle claims over the 2010 oil spill.

Smaller Banks Are More at Risk

Given the duration of the weakness in oil prices, bank stocks with energy exposure have remained in focus as credit risk concerns increase. Standard & Poor’s recently said that 50% of energy junk bonds are distressed and are at risk of default.

During the previous quarter, several of the largest domestic banks warned the market about the ripple effects caused by weak oil prices. Some of these banks include Citigroup (C), JP Morgan Chase & Co. (JPM), and Wells Fargo & Company (WFC).

Even though the larger banks have more energy loans outstanding, the loans make up a much smaller part of their respective asset portfolios. For example, JPM’s energy loan composition is just 1.8% while Texas Capital Bancshares, Inc. (TCBI) and Green Bancorp, Inc. (GNBC) have a 9.5% and 10.7% energy loan composition.

Selectivity Is Key: Three Top Picks

We continue to believe that the smaller banks will be more affected by weak oil prices and see value in owning smaller regional banks that are not heavily levered to the energy sector.

Our top picks in the banking industry include Meta Financial Group, Inc. (CASH), BofI Holding, Inc. (BOFI), and Bank of the Ozarks, Inc. (OZRK).

By Michael Berger, President of

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