Third-quarter earnings season has begun, and the "big four" U.S. banks -- JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) -- were among the first companies to report their results. As a whole, bank earnings look quite strong so far.
In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the key trends we're seeing in banking right now.
A full transcript follows the video.
This video was recorded on Oct. 15, 2018.
Jason Moser: Let's talk about earnings first and foremost, though, Matt. Big week here with JP Morgan, Citigroup, Wells Fargo, Bank of America earnings just came out this morning. A lot of common themes out here we've talked about in these shows leading up to this week. Strong net interest margin growth, it looks like. Credit quality is looking good. Tax reform is playing out, I think, on these bottom lines, as we expected.
Give me your 50,000-foot view here. What do you think about these big four? What do we need to take note of?
Matt Frankel: For starters, banks are one of the more predictable sectors. You generally don't see too many surprises when it comes to earnings. For example, it's generally easy to analyze a bank's deposit base, how much interest they're getting on their loans and make a good guess of where their earnings are going to fall.
Having said that, the general word I could use is good. Everything's looking very good. Tax reforms boosted earnings. Three of the four banks beat earnings expectations. Profitability is getting higher. Loans and deposits are growing in most of the banks. With the exception of Wells Fargo, deposits are up 4% across the board. Loans are up nicely. Banks are getting more efficient because of technological advances in the industry.
We've been talking nonstop the past few episodes about the war on cash. The big banks are also a beneficiary of that. Zelle is their big app that's saving them some money on deposit costs and things like that.
Moser: Let me ask you a real quick question here before we go on. One thing we talked about here is tax legislation. Tax reform has certainly helped a lot of these businesses, and banks are no exception there. How much of this profitability, do you think, is due to share repurchases? Is it contributing? Is it material? Is it something we need to keep an eye on? Where do share repurchases fall in these big banks' earnings reports this quarter?
Frankel: It's definitely playing a pretty big role. The equalizer is looking at the revenue figures. Revenue's up 1-4% generally across these big banks. That puts in perspective how much of the growth is due to share repurchases and how much is due to actual growth in the business. Numbers like loan growth and deposit growth don't really have much to do with repurchases. But when you see that earnings are up 43% year over year in Bank of America's case, a lot of that is tax reform and share repurchases, absolutely. It's important to give yourself a rundown of all the numbers, not just look at the headlines, to see where the growth is coming from. You're right, share repurchases is a big part of it, especially in Wells Fargo's case. They had a record-breaking share repurchase this quarter.
Moser: That's good advice. It's important to note, we're not just picking on banks. Share repurchases is the flavor of the quarter here. I think a lot of these companies are really benefiting from that. And that's OK. Maybe you could make the argument that it's not trickling down to Main Street, as some might like. I would counter that by saying, if you are invested, then you are feeling that, and that's a good thing. It's a good excuse, if nothing else, to get invested, right? You need to be playing the game in order to be able to win.