Financial Sector Recovery For 2013

Includes: BAC, JPM, WFC
by: Randy Lacen

The U.S. financial sector is predicting commercial and industrial loan portfolios are set to rise in 2013. Net loans and the provisions for loan losses generally provide major support to a bank's top line growth, since these assets often carry higher risk returns than other various private sector investments. In 2013, it is estimated that the overall U.S. bank loan loss ratio dropped about 40% from all time highs back in January of 2010, as the U.S. housing crunch is now coming out of deep-freeze. Restoring confidence in the U.S. banking sector is essential in ensuring credit flows are consistent in the commercial lending space, as 155,000 new jobs were also created at the start of 2013. Net loans attributed to job growth in the U.S. can be directly linked to causing home values to rise as much as 37%.

The largest U.S. bank by assets, JP Morgan Chase and Co., last Wednesday said profits in the fourth quarter increased 53 percent from last year driven by higher net revenue and even higher loan loss reserves. Under a proposed U.S. accounting rule change, the Financial Accounting Standards Board in 2013 pushes banks to start recognizing losses on loans and other financial receivables when firms see early signs of potential loss. FASB is quoted in a Bloomberg article back in December 2012: "Speaking with many of the larger financial institutions in the U.S., they've told us -- again without the rigor of a complete adoption of the proposal -- that they're estimating that their losses might increase in the range of let's say 50 percent." Bank of America has become another credible indicator as to the trajectory in which the banking sector is headed toward in 2013. There are not many advocates for the recent accounting practices out of the U.S. banking giant, which are said to be brought around to leverage Bank of America out of its earnings slump. As far as loan loss reserves releases are concerned, some bulls on Wall Street as well as the U.S. comptroller have sent out warning flares to the financial sector by arguing that the economy remains too rocky for financial institutions to lower their cushions.

As 2013 progresses, the U.S. Federal Reserve Bank continues to raise the amount of lending and activity in the economy indirectly by cutting interest rates. Quantitative Easing has not only led the United States out of the deepest economic recession since the Great Depression through the mass purchase of government debentures, but pension funds and insurance firms are now more enthusiastic about lending to companies and individuals as more money is spent while the economy gains traction. A lower interest rate environment has been heavily criticized by the investor community on an interest net margin perspective, but Fed officials remain ardent on a low-rate policy by making it cheaper for companies and individuals to borrow. The superlow rates are encouraging a surge in mortgage refinancing that is bolstering fee revenue at J.P. Morgan Chase & Co. and Wells Fargo & Co., which together control roughly 44% of the mortgage market. Banks will remain profitable come 2014, as commercial and industrial lending growth carries on full-swing.

The investment community just released Q4 2012 bank estimates as results came in better than anticipated. Fourteen out of 18 banks beat analyst consensus or were in-line with Wall Street estimates. The key issue for many on the Street remains the interest net margin situation for financial stocks. Margin pressure continues to be an issue this quarter and according to management will likely persist in 2013 as well. Investors have made their voices heard about interest net margins largely muting the impact of loan growth. However, while margin pressure continues to hinder net interest income growth, solid loan growth is at least helping to balance out the ongoing negative. The vast majority of U.S. banks saw decent sequential growth in both total assets and net loans. IStockAnalyst reports: "For many banks mortgage refinancing activity, helped along by government programs like HARP (Home Affordable Refinance Program), has been particularly noteworthy as a catalyst to loan growth. Commercial lending was also a notable positive for a number of regional banks in particular."

Stock market participants are still very bullish and buying stock within the financial space, as the battle with the U.S. Federal Reserve Bank and interest net margins is said to be transforming the banking industry from savings and loans to "services and loans" according to Dan Geller Vice President at Market Rates Insight in the Wall Street Journal. But, CIBC analyst Robert Sedran jotted down in a note January 25, to all his clients reminding them: "Despite the high proportion of beats to misses, on average next year's consensus EPS estimates were revised modestly higher (+0.6%) across the group. That is in-line with the earnings revision we saw after Q3/12 reporting, and is reflective of the mixed fundamentals for the sector as a whole".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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