Consumer Credit for July is released at 3 p.m. Eastern with the markets expecting an increase of about $10.0 billion in the last month. The report for June credit disappointed the market with expansion of just $6.5 billion on expectations for $10.0 billion and May credit was also downwardly revised by $400 million to $16.7 billion.
The rebound in consumer credit since the recession, now at almost 6% annual growth, is masking a much higher rate of growth in student loans versus slower growth in other types of non-revolving credit. Student loans accounted for approximately $6 billion of the $9.1 billion in non-revolving loan growth in May. The growth in student loans has contributed to non-revolving credit expansion for 24 of the last 25 months. Revolving lines of credit, a better indicator of consumer lending, have posted alternating results over the last four months with losses in April and June against gains in March and April.
Revolving lines of credit are fairly volatile and speak to the still uncertain environment for consumer demand and retail sales. Housing definitely seems to have bottomed and employment continues to add jobs, which should backstop the balance sheets for household's finances. Bank willingness to lend has increased over the last year and the credit cycle is not quite at peak but misses on the monthly credit report have moved shares of financial companies lately. Investors should keep an eye on the credit report and Fed surveys each month for signs of a slowdown in lending and the general economy.
Bulge bracket firms remain weak
Despite strength in credit growth, the environment for large commercial and investment banks is still challenging. M&A activity has yet to pick up and trading fees are still weak on low volume. The recent optimism in the global economy could be derailed when investors figure out that monetary stimulus will not save large banks from miserable earnings.
Goldman Sachs (NYSE:GS) reported Friday that it was being sued by a third investor in less than a week for misrepresentation of mortgage-backed securities it sold. The $55.8 billion bank receives approximately 15% of revenue from investment banking, 18% from investment management, 8% from proprietary investing and 59% from institutional client services (ICS). Much of the ICS revenue is from trading which is still lagging other market activities. Shares are up over 23% in the last three months and 13% over the last year. The shares trade for a relatively expensive 17.4 times trailing earnings and a 1.6% dividend yield. Valuation and a weak environment for core business mean the stock could give back recent gains on headline risk in credit growth or earnings.
Citigroup (NYSE:C) is offering $967 million in commercial mortgage-backed securities as investors search for yield over Treasuries. With global economic growth still tenuous, investors have poured into the bond market but are being forced to lower credit quality to find yields with real return and safety of principal. Though the bank offers investment banking and institutional services, it has a larger exposure to retail banking than the other bulge bracket firms which should help diversify and support growth. Shares are up over 15% in the last three months and 19% over the last year. The shares trade for 9.3 times trailing earnings and a pay a 0.1% dividend yield. A relatively lower valuation and stronger focus on retail business should help the bank sustain any temporary market weakness but still participate in the upside.
JP Morgan (NYSE:JPM) cannot seem to get beyond its losses on credit derivatives and recently released that it was being investigated by a senate subcommittee. While the investigation is little more than political grandstanding before the elections, the company will have a hard time improving sentiment until it lays to rest fears of yet undisclosed losses. Shares are up over 16% in the last three months and 21% over the last year. The shares trade for 9.1 times trailing earnings and a 3.1% dividend yield. While sentiment over the credit derivatives debacle has held valuation down, the bank is still exposed to macro weakness in institutional services and could drop on headline risk in earnings.
Improvement in household finances should help retail banks
Banks with a larger footprint in retail services and consumer lending should do relatively well as the housing rebound improves household balance sheets. A rebound in home prices will help push the trend in consumer deleveraging by increasing the amount of assets relative to debts for households. This will help improve credit ratings and increase banks' willingness to lend.
Shares of Wells Fargo & Company (NYSE:WFC) have rebounded sharply in the last year on strength in the company's home lending business. The bank is the largest in the U.S. by market cap and recently reported plans to expand its workforce in Asia by at least 10 percent over the next three years. Shares are up over 11% in the last three months and 45% over the last year. The shares trade for 11.6 times trailing earnings and a 2.5% dividend yield. Despite the strong recovery in share price, the bank has positioned itself for the rebound in housing and is increasing its exposure to faster growth markets outside the United States.
BB&T Corporation (NYSE:BBT) has found an innovative way around stagnant growth in the labor market. The $23 billion financial services holding company announced in late August that it would start offering supplemental unemployment insurance. Premiums are estimated to cost an average of 1% of an individual's annual income in exchange for an insurance product that supplements unemployment insurance to 50% of a workers former income. The company's exposure is particularly strong in the Southeast, a region hit hard by the recession but now rebounding. Shares are up over 13% in the last three months and 54% over the last year. The shares trade for a relatively expensive 13.7 times trailing earnings and a 2.4% dividend yield. While shares are relatively expensive on a valuation basis, the company is well positioned in retail services and is finding innovative ways to increase revenue.
Disclosure: I am long C. 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.