Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:
Banks See Profits, Rising Pressures [Wall Street Journal]
Summary: Wells Fargo recorded a very strong quarter yesterday. Highlights: Revenue grew 5% to $8.93 billion, below consensus projections of $8.99 billion; costs grew 4% to $5.08 billion; 20% ROE was highest since Q1 2004; net income grew 11% from $1.98 billion (58 cents a share) a year earlier to $2.19 billion (64 cents a share). But the general picture arising from seven regional banks to report so far is far from optimistic. Banc of America Securities analyst John McDonald commented: "They're making the numbers, but the quality of earnings is starting to deteriorate, with increased reliance on cost-cutting, share repurchases and lower tax rates". Net interest margin was down at five of the banks, with Sovereign Bancorp recording the sharpest decline. Rising interest rates combined with the strong stock market have resulted in the banks also suffering from depositors shifting into more expensive instruments such as CDs or transferring deposits to more stock-savvy investment managers. Additionally, as reflected in WFC's increase in loan charges as a percentage of average loans, warning bells are beginning to chime on the borrowers' end.
Related links: Wachovia Disappoints on Revenue • WSJ's Coverage of Banks' Earnings • Reuters: Wells Fargo, US Bancorp lead higher bank profits
Potentially impacted stocks and ETFs: Wells Fargo (NYSE:WFC) • U.S. Bancorp (NYSE:USB) • SunTrust Banks Inc. (NYSE:STI) • National City Corp. (NCC) • KeyCorp (NYSE:KEY) • AmSouth Bancorp (ASO) • iShares Dow Jones US Regional Banks Index Fund (NYSEARCA:IAT) • iShares Dow Jones US Financial Sector Index Fund (NYSEARCA:IYF) • iShares Dow Jones US Financial Services Index Fund (NYSEARCA:IYG) • Regional Bank HOLDRs Trust (NYSEARCA:RKH) • Vanguard Financials ETF (NYSEARCA:VFH) • Select Sector SPDR Financial (NYSEARCA:XLF)
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