Wed, 16 Apr 2014
Ongoing legal expenses and varying loan growth hindered recent earnings for major U.S. banks, but better dividend yields bring Wells and JPMorgan ahead of their peers.
Jim Sinegal: We have big banks reporting earnings this week, and I think the results were a little bit disappointing.
The first big problem the banks have is that legal expenses are continuing. We're five years in now post-crisis, and Bank of America, for example, reported $6 billion in litigation expenses this quarter. I think we're at a point where the costs of being big are outweighing any of the advantages the banks are gaining from scale and scope, and I think that legal expenses at some level are going to continue for the foreseeable future. I think there is a lot more to the argument at this point that the big banks are too big to manage. I think that's coming through in results and it's going to limit earnings expansion going forward.
The second big point with earnings this quarter is we're starting to see the bifurcation of developing markets versus developed markets in terms of loan growth. Bank of America being heavily exposed to the U.S. consumer is seeing falling loans across almost every category. Compare that with Citigroup where they're still seeing decent growth in Latin America and Asia. We think that's another big-picture trend that's going to affect bank earnings for years to come. Emerging-markets consumers just have a lot more room to borrow than developed-markets consumers.
The third point is on the capital front. One thing that's been positive for the banks is that capital levels at this point are good across the board. Even Citigroup, which failed the CCAR, is good from a quantitative basis. They just had some compliance issues that are preventing them from returning capital.
We think one good way to distinguish the banks right now is by dividend yield. Wells Fargo and JPMorgan are clearly the most attractive of the big banks on that basis, and we think Wells has better potential for growth going forward just because they don't have some of the legal, the regulatory issues, that JPMorgan will have. Wells Fargo has been our favorite bank for a while and remains our favorite bank, although most of them at this point are fairly valued.