Banks Going Bananas

by: Quoth the Raven

So far, over the last year, it's looking like the banks are back - and going bananas.

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It's been an exciting and interesting season in earnings for banks. Earnings reports have been exceeding expectations by far, but some confidence for the future wanes due to high interest rates affecting mortgages - and some profits rose due mostly to curbing expenses. Last week we heard from three notable banks, all of whom had decent results to report.

Wells Fargo (NYSE:WFC) had an outstanding quarter, attributable mainly to a drop in expenses.

Forbes reported on Wells Fargo's earnings:

At Wells, overall revenue was relatively flat at $21.4 billion compared with $21.3 billion in both the previous quarter and the second quarter last year.

Profits, however, were up a record 19% marking the fourteenth consecutive quarter of rising profits for the bank. How does that happen? Cutting expenses helps as does releasing reserves.

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Wells Fargo, like JPMorgan (NYSE:JPM), stated they were preparing for a decline in mortgage activity due to interest rates.

Commerce Bancshares (NASDAQ:CBSH) also had a "decent" second quarter. Although revenue came in a bit light, it was due to securities losses that made the quarter look at bit worse than it was. Its lending growth - a nod towards the future - was up considerably.

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JPMorgan announced that its Q2 EPS was up 32% on the heels of lower loan losses and reduced expenses. It's net income rose to $6.5 billion from $5 billion this quarter last year. JPM's revenue came in at $26 billion versus $22.9 billion the year prior.

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JPM's CEO, Jamie Dimon, warned that higher interest rates could negatively affect the banks profits going forward if they wore away demand for mortgage refinancing.

This past Monday, Citigroup (NYSE:C) set the tone for the banking sector for the week - bullish. Citigroup's stock bumped up 2% on the day Monday, pushing it to a record high.

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Citi reported profits up 41%, citing customers' payment habits on mortgages and rising loan volume. Net income was up to $4.2 billion compared to $2.9 billion the year prior.

Citigroup earned $1.25/share. Revenues were up 8% to $20 billion. The report beat analysts' expectations across the board. As I argued in a previous article, Citi set the tone for the major markets, helping the S&P climb for what was its 8th day in a row.

On Tuesday, Charles Schwab (NYSE:SCHW) reported less than stellar, but still decent earnings. They reported a profit but missed Wall Street's expectations. However, they did beat on revenues, which can be a positive nod to the future growth of the company.

The company pulled back about 12% in the two trading days after their report. Schwab has still had a great year, up over 25% in the last six months alone.

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Also on Tuesday, Goldman Sachs (NYSE:GS) demolished earnings expectations. USA Today reported:

Goldman Sachs said its second-quarter profit doubled, as the giant investment bank saw revenue climb 30% while stock and bond underwriting sales rose by nearly half.

Goldman said it earned $1.93 billion for the three months ending June 30, or $3.70 a share. The results handily topped analysts' average estimate of $2.87 a share in net income, according to FactSet. The firm earned $927 million, or $1.78 a share, in the second quarter of 2012. Revenue climbed to $8.6 billion.

"It was a solid quarter in what continues to be a dynamic market environment,'' Chief Financial Officer Harvey Schwartz said on a conference call.

Despite the gains, Goldman shares dropped 1.7% on Tuesday, down $2.76 to $160.24.

One reason may be that almost two-thirds of the revenue gain came from its historically volatile business of holding equity stakes in companies and bonds for the firm's own account.

The bank nearly tripled its revenue from investing in bonds that it owns, to $658 million, the company said. Investments in stocks generated $462 million in revenue, compared with negative $306 million in the second quarter of last year. Those numbers fluctuate because Goldman adjusts its earnings each quarter to reflect fluctuations in the value of those positions, spokesman David Wells said.

Additionally, on Wednesday morning, Bank of America (NYSE:BAC) demolished expectations on both lines, reporting Q2 EPS of $0.32 and revenue of $22.9B.

It's second quarter profits skyrocketed, up 70%, assisted by cost-cutting and investment banking. BAC, the second biggest bank in the country, managed to cut expenses about 6%. It cut about 18,000 jobs and reduced total employees by about 11%.

They were also helped by trimming the amount of branches they had open, and a reduction in legal expenses. The bank recently settled a few major lawsuits that were a drain on the company's cash.

I recently wrote about BAC:

As you can see from this chart, the $14 range (from a technical standpoint), looks to be the area to breakthrough for a major rally. Can this upcoming earnings call be the catalyst for this? Heading into earnings, BAC is looking like a bullish call for me.

If Bank of America can impress with this technical momentum behind it, the next step will likely be through $14, which will spur a larger rally in this investor's opinion. The RSI is looking healthy, not having been oversold for a few months, indicating there's technical room for the stock to move upward without being overbought.

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QTR's Analysis

Want your fix of trading banks around earnings? You have a couple of options.

This morning, at the time of this writing, BAC was already trading up $0.20 to $14.12. I still contend that BAC is a great buy right now. There's a large chance they're going to raise their dividends in the near future and if the company can sustain over $14, there could be a breakout and rally upwards to the $16-$18 area.

This Friday, First Niagara Financial Group will be reporting. First Niagara Financial (NASDAQ:FNFG), another winner posting 33.7% gains over the last year, leads the earnings charge at the end of the week.

First Niagara has been the definition of a steady stock to be in, bouncing from $7 to $14 and back down again countless times in the last 10 years.

The bank is growing into more than a regional bank, the dividend yield is 3.92%, and insiders buy shares constantly. Analysts are going to be looking for $0.18 /share. First Niagara is a bank expanding and reminds me of a young TD Bank. I'm bullish here on growth into earnings.

First Niagara could be your bank play, as QTR is assessing that its likely going to follow in the footsteps of the banks that have already reported - fueled by growth, as opposed to cost cutting, in FNFG's case.

In terms of purchasing the banks that have already reported, it's going to be important to keep an eye on how interest rates are going to affect banks this quarter - especially mortgage lenders like Wells Fargo and JP Morgan. In the short term, these banks might not be the best bet, but I remain bullish long-term on these dividend paying bank staples.

As always, I wish all investors the best of luck.

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.