Us big bank earnings season: economic expansion helps revenue, triggering another round of US stock rally

Since last week, a number of major US banks have reported third-quarter results. Benefiting from positive factors such as economic expansion and rising interest rates, JPMorgan Chase & Co (JPM),Bank of America Corporation(BAC) the third-quarter results exceeded expectations, and the loan business became a bright spot. However, as market volatility remained low, trading business generally fell sharply compared with the same period last year, although the overall positive pattern offset this decline.

Us stocks continue to climb as banks take the lead in the earnings season, which is expected to be strong. On Monday, the Dow Jones industrial average opened above 23000 for the first time in history; the s & p closed up 0.01% of the 11 sectors, 4 up and 7 down, led by financials.

The performance of big US banks exceeded expectations.

In the third quarter of this year, JPMorgan Chase & Co's net profit was US $6.73 billion, up 7.1% from the same period last year, return on equity (ROE) rose to 11%, and loan, asset and wealth management businesses performed well. Bank of America Corporation's net profit increased by 13% to US $5.59 billion, and ROE increased by 8.1%. Citibank's net profit reached US $4.13 billion, an increase of 8% compared with the same period last year, and Roe rose 7.3%. However, Wells Fargo & Co did not perform well in the third quarter because of the fake account scandal, with net income falling to $4.57 billion from $5.64 billion in the same period last year, while earnings per share (EPS) fell to 84 cents from $1.03 in the same period.

Jamie Dimon, chairman and CEO of JPMorgan Chase & Co Group, commented: "the global economy continues to operate smoothly, American consumers are still full of vitality, and wages are rising steadily. The net interest margin of the bank's loan-related business rose to 2.37% from 2.24% in the same period last year.

At present, the US federal funds rate range is 1% Murray 1.25%, and people are expected to raise interest rates again in December. Given that the US economy is still steadily expanding and the impact of the hurricane will gradually dissipate, these factors are good for bank performance.

For JPMorgan Chase & Co, which took the lead in releasing the three-quarter report, the third quarter continued the strong growth momentum of the second quarter, outperforming its peers, its loan business became the cornerstone of revenue growth, and the asset and wealth management business became a sharp weapon to boost ROE. The ROE of JPMorgan Chase & Co's wealth management business soared 29% compared with the same period last year.

The bank's average core loans rose 7 per cent year-on-year and 2 per cent quarter-on-quarter, and the rise in benchmark interest rates also widened the bank's net interest margin. China International Capital Corporation calculates that the net interest margin of the company's loan-related business, a measure of the company's profitability to lend and reinvest customer deposits, rose to 2.37 per cent from 2.24 per cent in the same period last year.

In addition, in terms of JPMorgan Chase & Co's corporate and investment banking business, ROE was 13% in the third quarter, continuing to top the ranking of global investment banking service fees, with a market share of 8.2% since the beginning of 2017.

However, the bank's market business (that is, trading) revenue fell 21%, of which fixed income revenue fell 27% year-on-year, continuing the decline in the previous quarter, mainly due to rising interest rates and VIX (volatility) remained below 10.

Bank of America Corporation's third-quarter results, which have risen sharply since last year, also exceeded expectations, with net profit rising 13% from the same period last year to $5.59 billion, equivalent to $0.48 in EPS, the highest since 2011 and better than market expectations. Adjusted income rose 1% to $22.08 billion from $21.86 billion in the same period last year, also better than market expectations of $21.98 billion. The bank's third-quarter performance also benefited from higher interest rates, and the company's cost-cutting measures have achieved some results.

It is worth noting that Bank of America Corporation's net interest income increased for the second consecutive quarter in the third quarter, up 9.4% from a year earlier to US $11.4 billion, contributing half of the revenue.

Similar to JPMorgan Chase & Co, Bank of America Corporation's retail banking and wealth management business income growth offset the decline in bond trading income. The bank's trading revenue fell 13% year-on-year, but better than JPMorgan Chase & Co and Citibank. Of this total, revenue from the fixed income, currency and commodities trading business (FICC), which excludes valuation adjustments, fell 22 per cent year-on-year to $2.17 billion, slightly above expectations of $2.15 billion.

Citibank's third-quarter results also exceeded expectations, showing the effectiveness of cost control. The bank's third-quarter net profit rose 8% from a year earlier to $4.13 billion. EPS was $1.42, beating analysts' average expectations of $1.32, while revenue also rose 2.3 per cent year-on-year to $18.17 billion, also better than market expectations of $17.89 billion.

From the revenue side, low volatility led to a sharp decline in fixed income transactions, but the good performance of the institutional banking business offset the losses of the trading business; from the cost side, fees were successfully reduced by 2% in the third quarter compared with the same period last year, effectively promoting profit growth.

However, although Citigroup's ROE rose to 7.3 per cent in the third quarter from 6.8 per cent in the previous quarter and the same period last year (thanks to share buybacks of more than 200m shares in the past year), it was still weaker than its main competitors and lower than the theoretical 10 per cent cost of capital, so the company's share price fell after the results were announced.

By contrast, Wells Fargo & Co is not so lucky this time. Trapped by the false account scandal, the bank performed poorly in the third quarter, with net profit falling 18.6% to $4.57 billion from $5.64 billion in the same period last year, mainly due to the inclusion of $1 billion in legal expenses; third-quarter revenue was $21.9 billion, down 2% from a year earlier, below expectations of $22.4 billion; EPS for the quarter was 84 cents, including 20 cents per share in litigation fees In addition, mortgage banking revenue fell more than 37%, dragging down profits.

As early as September 2016, federal government investigators said Wells Fargo & Co was suspected of fraud by opening as many as 2 million deposit and credit card accounts without customer authorization. This has seriously damaged the bank's credibility.

In July 2017, the bank admitted that it had charged hundreds of thousands of car loan borrowers car insurance premiums that were not required or needed by borrowers. Between January 2012 and July 2016, more than 800000 customers who received car loans from Wells Fargo & Co were charged car insurance premiums without the need for insurance. The cost of repeated insurance led to a bad record of 274000 customers and led to the recovery of 25000 customers' cars.

There are hidden worries behind the rise of US stocks.

Not only bank stocks have climbed, but the economy and profits have also pushed overall US stocks to new highs. However, uncertainty is dense in the fourth quarter, and U. S. stocks are already relatively expensive.

Morgan Stanley U.S. stock strategist Michael J. Wilson and others said in the report that if investors expect companies to report strong results, stock prices usually rise before the earnings season, and then fall back when the results are actually announced. This is also known as "selling fact" by wall street, and this has happened in the first two quarters of this year, but the volatility of u.s. stocks was relatively small at the time, with a maximum decline of only 3%.

However, Morgan Stanley believes that this time it may be different, with the S & P 500 falling as much as 5 per cent. Morgan Stanley believes that the following factors may trigger this correction: the Federal Reserve shrinks its schedule; tax reform legislation is said to be easier said than done; the new chairman of the Federal Reserve has revealed that it may impact financial markets and the dollar is off its multi-year lows, showing signs of rising; and leading economic indicators have hit highs and the signs of peaking are more obvious.

However, many institutions still have confidence in US stocks. Lukas Daalder, chief investment officer of Hobao Investment Solutions Group, told China Business News that although US stock prices are high, they still have strong momentum. Us stocks will maintain their upward momentum, and US stocks will still be the safest even if there is an unexpected event in the market.

His analysis said, "although the road ahead seems to be obstacles, but in the end we will find that there is nothing to hinder the rise of US stocks." September is often the most volatile month? But please ignore it; lack of progress in Brexit negotiations? But no one seems to care; the situation in North Korea poses a market risk? But the market seems slightly numb to geopolitical risks; the US lacks core political leadership? That's not a problem. At the moment, the US market is more inclined to ignore these risks, and the momentum is still strong to look for reasons to continue to climb. "

But Lukas Daalder says this could lead to growing concern among investors, as U. S. stocks have become very expensive. Hobao's research shows that over the past six years, the s & p 500 reported a 22% rise in EPS, while the index rose five times as much as EPS (122%) over the same period, so there is no doubt that the rise of u.s. stocks over the past few years has exceeded the potential economic trend. He also told reporters, "if there is a global stock market adjustment, holding US stocks is often the safest, because in the event of a correction in global stock markets, US stocks usually fall less." Even for events directly related to the United States, such as' 911 'and the subprime mortgage crisis, European stock markets have fallen even more than American stocks. "

Liu Gang, an overseas strategist at China International Capital Corporation, found that earnings contributed 7.6 per cent of the 13.9 per cent rise in the S & P as of August, while the NASDAQ contributed 11.1 per cent, higher than the 10.2 per cent valuation expansion. Although the current valuation of US stocks is indeed on the high side, the agency does not think it is serious enough to "bubble".