On Wednesday, 20 January 2016, the last major US financial bank reported its earnings. Goldman Sachs - one of the most internationally recognized financial institutions - conducted financial transactions in excess of $1 trillion last year. The company's financial reports revealed earnings per common share of $12.14 for 2015, with Q4 earnings per common share coming in at $1.27. The company's return on equity (annualized performance) for Q4, 2015 was 3%. However the financial settlements as a result of RMBS reduced earnings per common share by $6.53 last year and by $3.41 for Q4, 2015. Goldman Sachs, like so many other US banks was slapped with punishing fines following the 2008/9 global financial crisis.
In fact, this banking, conglomerate has paid over $5 billion in settlement fees - a big reason for the precipitous decline in revenues, profitability and earnings per share. Common shareholders net income decreased by 71.8%, to $1.27 per share. In 2014, the EPS was reported at $4.38. On an upbeat note, revenues for Q4 were reported at $7.27 billion, up from $7.07 billion forecast by analysts. Traders wanting to take a position on Goldman Sachs certainly had some direction with the increased actual performance over the consensus forecast. But there are immense pressures weighing on banking stocks like Goldman Sachs, not least of which is China weakness, oil price weakness and the return of Iran to the international arena.
There is no escaping the short to medium-term pressures that major averages are going to be facing as a result of crude oil weakness. The IAEA recently exculpated Iran of any wrongdoing by agreeing that the country had complied with nuclear non-proliferation and was free to start trading in the international markets once again. It is estimated that Iran has up to $100 billion in frozen assets that will now be unfrozen. The country has scores of oil tankers operating offshore with an estimated 12 million barrels of crude oil in stockpiles waiting to be dumped onto markets. Additionally the Iranian oil ministry instructed oil producers to start pumping out oil at maximum capacity - 500,000 barrels of oil per day. While other OPEC countries welcome the reintroduction of Iran into the oil markets, they are not happy about what excess output capacity is going to do to the price of crude oil. An ongoing spat between Saudi Arabia and Iran threatens to destabilize the oil cartel, the region and the world, but it appears as if tempers are calming in the interim.
Meanwhile, major averages on Wall Street are no longer trading on the fundamental strength or weakness of various sectors in the US economy - they are trading on bearish sentiment vis-a-vis crude oil and China weakness. As the price of crude oil continues to slump, so markets are seeing some of the worst selloffs in recent history. This is evident in the Dow Jones, the NASDAQ and the S&P 500 which have been losing ground throughout 2016. Banking and energy stocks have effectively become persona non grata in the economy, owing to the high degree of volatility and uncertainty that these industries operate in. Just recently, Bank of America made $500 million in credit facilities available to its oil producing clients to help them through a cash-crunch brought on by oil that has broken through the critical $30 per barrel barrier.The Takeaway: Bank of America and Goldman Sachs showing improvement
Meanwhile, Bank of America has surprised analysts with stronger than expected earnings. On Tuesday, January 19, the company posted its financial reports and they are bullish. In fact, Bank of America reported $15.8 billion in profits - the best annual performance in 10 years. Even more impressive is that the 2015 figure is double that of 2014. At the heart of increasing profits for banking institutions like the Bank of America and Goldman Sachs are things like restitution from fines imposed upon his bank institutions during the global financial crisis and the aftermath.
For Bank of America, here are some of the metrics that are most important: Q4 profits for 2015 were reported at $3.34 billion, up from $3.05 billion in Q4, 2014. Adjusted revenues were reported at $19.76 billion, $0.06 billion less than consensus estimates. The stock price of Bank of America is currently $13.70 on the NYSE. The poor performance of banking stocks has precious little to do with their recent strong gains and more to do with pervasive weakness in China, commodities and emerging market currencies. But now is not the time to invest, because markets are likely to move lower before the inevitable turnaround!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.