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Banks Are Getting More Profitable: Here's Why

By Motley Fool Staff – Apr 18, 2018 at 12:42PM

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The largest U.S. banks are reporting some impressive profitability metrics.

Now that all of the big four U.S. banks have reported first-quarter earnings, we know that return-on-equity and return-on-assets metrics are the best in a long time. This is not only due to the impact of tax reform, but solid growth and expense reductions are also contributing.

A full transcript follows the video.

This video was recorded on April 16, 2018.

Michael Douglass: Of course, all that translates to much better profitability.

Matt Frankel: Right, we're seeing some profitability numbers from the banks that we have not seen in over a decade. JPMorgan (JPM 4.68%) was the shining star of this quarter. I know that's one of Michael's favorites as far as the big banks go. JPMorgan put up a 15% return on equity and 1.37% return on assets. This is getting into the realm of an internet-based bank, in terms of profitability. Just to give you some context, that's up from 11% on return on equity and 1.03% on return on assets just a year ago. A lot of this is fueled by tax reform, which we'll talk more about in a minute. But a lot of it is just good old-fashioned expense reduction and growth fueling these profitability numbers. Wells Fargo (WFC 4.71%) put up over 12% on return on equity, 1.26% on return on assets. Generally speaking, the industry benchmarks are a 10% return on equity and a 1% return on assets. Bank of America (BAC 4.15%) exceeded both of those for the first time since the financial crisis. So, these are really positive signs for bank investors, that things are really truly finally returning to normal.

Douglass: Yes. And a sign, as well, that as interest rates continue to rise, there's going to be long-term margin expansion for these banks which, anyone who's a bank investor, that's a good sign. Although, not, perhaps, as much margin expansion as expected. Citigroup (C 4.35%) saw their net interest income miss, just slightly. It was $11.17 billion vs. $11.26 billion. Not a huge miss, but a slight one there. Another strong point for banks, wealth management.

Frankel: Yeah. Wealth management has done well, and there's two things you need to know about the wealth management numbers you're seeing in bank earnings reports. The stock market has been doing great over the past year. If you look at where the stocks you own were a year ago and where they are today, they've probably done pretty well. So, assets under management at a lot of wealth management firms have gone up just because of that, because the assets themselves are worth more. What you really want to pay attention to is what are called inflows, or net flows, is how a lot of the banks will put it. JPMorgan saw record inflows this quarter. That means people are putting money to work in investments rather than in cash. Merrill Edge, Bank of America's platform they acquired from Merrill Lynch several years ago, saw its assets grow by 18%. The stocks that customers own did not grow 18%. A lot of that was new investors coming into the market, people depositing more money in their accounts. So, this is really organic growth. It's really good to see.

Matthew Frankel owns shares of Bank of America. Michael Douglass has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$32.38 (4.15%) $1.29
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$44.41 (4.35%) $1.85
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$111.77 (4.68%) $5.00
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$43.54 (4.71%) $1.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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