The biggest US banks reported their fourth quarter earnings last week. The clear gainers were Goldman Sachs, Wells Fargo and Bank of America, whereas JPMorgan & Chase and Morgan Stanley missed expectations.
All the banks faced a drop in trading related revenue. Especially fixed income business was hit by the recent market volatility during the fourth quarter of 2018. It is definitely worth investors to look into during the following quarters of 2019. Similarly, the market volatility was a key issue for Morgan Stanley, which experienced losses in its wealth management division.
The amount of M&A deals were reported as record low during the fourth quarter due to the decreased corporate confidence. During the same time however, the big banks have managed to charge higher fees for the deals they've made. That has boosted the revenue from investment banking advisory and it looks like M&A bankers are currently performing better than fixed-income traders first time in a decade.
Goldman Sachs had its best earnings reaction day since December 2008 when the bank beat the expectations by posting a profit of $6,04 per share when analysts where expecting a profit of $4,45 per share. Especially corporate and consumer lending were the strengths at Goldman Sachs.
Similarly, Bank of America beat the expected EPS of $0,63 by posting an EPS of $0,73 from the fourth quarter, driven by the 52% increase in the bank's consumer bank business.
Despite the increase in consumer lending, credit quality remains healthy which is good news for the banks considering the future quarters and the interest-rate expectations.
However, mortgage business seems to be dragging. The new mortgage origination plunged approximately -20-30% at Wells Fargo, Chase and Citi. In the same time the current mortgage business doesn't seem to be highly profitable for the banks. This tells us that the consumers and home-owners might be cautious and expecting an economical downturn. The trade-war and the fear of a slowdown in the global economy has already lead the FED to cut its interest rate hikes for 2019.
Investors might want to keep an eye on the developments in the US housing markets and the fixed-income trading of the big banks which have been the main headwinds. Otherwise it seems that the banking business is doing well at the moment.
However, the expectations were driven rather low by the market volatility during the fourth quarter that pushed the bank stocks down.
Finally, the government shutdown will have an effect on the investment banking divisions, since new IPO's cannot be made at the moment. This can reflect on the earnings of the banks for the first quarters of 2019.
Disclosure: I am/we are long JPM.