An Important Quarter for Bank Earnings

10/11/2013 12:00 pm EST


Jim Jubak

Founder and Editor,

This quarter's bank earnings will be critical says MoneyShow's Jim Jubak and he explains how the earnings' profile for banks has changed.

For the week ahead, watch out for, no, not the debt ceiling, not the budget crisis in Washington, but bank earnings. We start to get bank earnings on Friday the 11th. We'll get JP Morgan. We'll get Wells Fargo. We'll get Bank of America. We'll get Citibank. This one is going to be a really critical quarter for banks, even without the background of all the macro stuff coming out of Washington, and it's going to be even more important going forward.

The real issue was, that it looked like banks were kind of running out of steam, in the way that they were showing better returns, that a lot of the earnings growth that we're seeing from banks has not been because the business has been getting better, but because banks have been taking reserves that they've put aside for bad debt and moving them back to earnings. When you reserve money for the potential that a credit card debt is going to go bad, it doesn't go into earnings, it goes into reserves, and then when you reverse the process and say, "Oh, credit cards aren't going as quickly as we thought," you put it back into earnings.

That's what really has been happening to banks and driving these stocks and their earnings upward for the last year. But in many cases, the reserves look like they're tapering off. I mean, you've only got so much in reserves, you can only take so much out each quarter. Citibank is probably the exception, it still has a huge bad bank setup, so it's still got billions and billions to move, and improve their earnings going forward, but for many banks, this was going to be the quarter when people were starting to say, "Well, we're seeing the reserve move taper off, how good is the banking business, period?"

One of the things that people have been looking at for the last couple of quarters, not getting too worried about, because there was still time for this reserve effect to take effect, they were saying, "Well, we're not seeing loan growth." That the bread and butter business of a lot of banks, even with all their trading operations, is still lending, and they weren't seeing any growth there, and that was what people were going to be looking for in earnings for this quarter, to see whether there's any sign that lending growth is starting to pick up.

It was going to be problematic, because there were worries about mortgage growth, which is a kind of lending, because as rates were going higher, mortgage applications and mortgage re-fi's were going down, but this is also just the basic bread and butter of personal loans and more corporate loans, were those going to be growing? One of the things that I think the mess in Washington has done is made a lot of businesses less eager, less willing to take out loans. It has a kind of inhibiting effect, so we may see that this quarter. People are wondering whether the mess in Washington is going to cut down on GDP growth. We may see that this quarter, and what we're going to be looking for, is not just what we see this quarter, because, after all, this quarter really stopped September 30 and goes all the way back to July 1.

What we're going to be looking at is what banks say about business going forward, because remember, we don't hardly have any economic data while the government is shut down, so what we're going to be relying on is banks saying, "Well, we think this is what we're seeing in the mortgage market, this is what we're seeing in the lending market." This is really a critical quarter for banks to make the transition, from being bad businesses that are getting better, to a state where they're a good business that's continuing to run, and the question is whether we get to that good business part of the cycle.

This is Jim Jubak for the video network.

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