Pro Perspectives 1/14/20

January 14, 2020

Fourth quarter earnings kicked off today, with three of the big four banks reporting this morning.   

The banks have been putting up good numbers for a while now, underpinned by strong consumer business.  But now the trading business looks like its coming back.  

The largest bank in the country, JP Morgan, beat earnings estimates, recording another new record profit.  Trading (Markets) revenue was up 56% from the same period a year ago.  

Citigroup beat for the twentieth consecutive quarter.  Trading revenue was up 28%.

We'll hear from Bank of America tomorrow.  BAC has had fourteen consecutive quarters of earnings beats.  Wells Fargo isn't enjoying the prosperity, but it's company specific.  Wells is a turnaround story, with a new CEO just three months on the job, trying to resolve the company's self-induced PR debacle.  And as smart new CEO's do, when entering a tough spot, they try to set the expectations bar low. That's being done with Wells.

Tomorrow we also hear from Goldman Sachs.  I suspect we'll also see a pop in trading revenues. 

Trading was the motherlode for banks prior to the financial crisis.  And the jig seemed to be up, following the failure of Lehman Brothers, when the regulators cracked down on proprietary trading, through the Volker Rule (within the Dodd-Frank Act).  

The line of managing the risk of market making activities and speculative trading, by the big banks, is a blurry one. And the Volker Rule put the burden on the banks to prove that their trading activity is against their market making activity. That weakened the market making businesses of the banks and increased compliance costs. And the major Wall Street banks were not the same. 
But since August of last year, that rule has been revised.  The banks now are "presumed" to be in compliance, rather than having to prove (as part of their everyday trading activities) that they are in compliance.  This was a fairly quiet final revision to a very important regulatory issue facing the big banks — and perhaps one that has begun bearing fruit.
With that in mind, if we look back at the sector weightings in the S&P 500, financials were the heaviest weighted sector in the years leading up to the financial crisis — at 22% of the index.  The financials currently make up just 13% of the S&P 500.