A Strong Start to Bank Earnings

Earnings season is now under way, and big banks have started to report their first-quarter results. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP discuss why first-reporter JPMorgan Chase (JPM 1.44%) set a high bar for everyone else.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 15, 2019.

Jason Moser: Let's kick into earnings season here. We've got banks that opened everything up for us late last week and going into this week. Remind me, Matt. Last week on Friday, I think we had Wells Fargo report, we had JP Morgan report. I think we had Citigroup report this morning. What was it that stood out to you in regard to any of the banks in particular, or the sector in general?

Matt Frankel: Friday, it looked like everything was going to be great for banks. JP Morgan is always the first. They have to beat Wells Fargo by about an hour. But they definitely started things off on a high note. They beat earnings. They beat revenue by $1.5 billion, which is a pretty big beat.

Moser: Yeah, what was the source of that?

Frankel: Their loan business is doing great. Higher interest rates are really translating into better interest margins. They ran a 16% return on equity, if that gives you any indication. We haven't even heard from all the banks, but I'm pretty sure that's going to be the highest. Fair to say.

Moser: Yeah, sounds like it.

Frankel: Loan portfolio grew by 4%, which a lot of banks didn't. Investment banking revenue popped by 44% year over year. Yeah. And net interest income was up by 8% thanks to the higher interest rates. That was a big part of it.

Moser: Yeah. We talked about a higher interest rates. It's all kind of relative. They still seemingly are very low, but they are higher. I mean, we talk about this a lot, as interest rates go up, banks do stand to perform better over time, even when it's just those little 0.25% rate increases. It doesn't take a lot.

Frankel: Right. Especially banks that have a big credit card business like JP Morgan does. Who doesn't have a Chase credit card somewhere in their wallet? I think most people have, it's fair to say. Amazon's a Chase credit card.

Moser: I was going to say, I think I do.

Frankel: If you have an Amazon card, you have a Chase credit card. It's a big credit card business. Their credit card business has been growing like wildfire. The credit card interest rates are the one of the few that are directly tied to the federal funds rate. As the feds hiked rates eight or nine times -- I think nine over the past few years -- it's really translated into higher profits for banks like JPMorgan.

Moser: Now, we read an article recently, it was the middle of the week last week as the bank CEOs were here in D.C. They were answering some questions that politicians were posing in regard to the banking system. Perhaps there are some folks who feel like the banks are getting a bit of a free ride, and business is almost too good, I guess. [laughs] If there is such a thing. Ultimately, what I took away from all of this was, it doesn't seem to me that we're in a position where we should expect legislation to change in such a significant way that it's going to impact these banks, certainly in the near term, and I don't even really think in the mid-near-term, if that makes sense. I think over the course of the next three to five years, it's going to be pretty much running as the status quo. I think these banks have a really friendly environment to be able to do whatever they want to do, right?

Frankel: It's a pretty friendly growth environment. Capital requirements are still relatively high in a historical context. If any regulations do get rolled back, I see it being the capital requirements on banks. But the tone is definitely not what it was a few years ago. You still have some politicians like Elizabeth Warren, smoke comes out of her ears every time she talks to a bank CEO. And maybe deservedly so! But, the tone is not as much, "We need to be restrictive on banks." A few years ago, especially in the few years following the financial crisis, the tone of any bank hearing was, "What are we going to do to keep these guys in check?" You're not really hearing that as much anymore. If anything, some regulations are starting to go the other way. Even a lot of Democrats were on board when they increased the SIFI requirement, the systemically important financial institution, from $50 billion to $250 billion a few years ago. So, you're even seeing some bipartisan support that maybe some of the financial crisis regulations went a little bit too far.

But yeah, I see it being businesses usual. This is probably the best growth environment for banks in about 30 years. If you roll back the capital requirements, it's definitely the best growth environment for banks. It could be a good few years for banks and their investors.

Moser: We're always talking about banks, of course, on this show. We talk a lot about the big banks. We talk a lot about the little banks. I think either which way you look at it, you need to have some dollars allocated to those companies. We talk, of course, a lot about the payments companies. That's a big part of it. But as we'll see in the coming weeks, whether it's the payments companies or the big banks -- and we're going to have interview here with Marcus coming up, where you're going to be shedding some light on what Marcus is doing there. I'm really excited for that. It feels like you have to have some investment dollars allocated to those banks. We'll keep an eye on them, of course. But I think if anything, this earnings season really tells us they are set up to succeed for a long time to come.