A Trio of Financial Sector Earnings

Earnings season is well underway, and our Industry Focus: Financials team is bringing you a recap of some of the biggest names' quarterly reports. Bank of America (BAC 1.06%), Morgan Stanley (MS 1.96%), and Travelers (TRV 0.34%) all reported their latest results last week. Host Jason Moser and Fool.com contributor Matthew Frankel break down what investors need to know.

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This video was recorded on April 22, 2019.

Jason Moser: We're going to get into some earnings here today. We've got Earningspalooza really kicking in full gear. We've got Bank of America, Morgan Stanley, Travelers on our radar today. Matt, tell our listeners the two-minute drill for Bank of America's earnings -- the good, the bad, the ugly, and what they need to be caring about.

Matt Frankel: Bank of America, like most of the other banks, beat earnings estimates. That's not really out of the ordinary. Most banks have been beating earnings estimates, especially since tax reform was passed last year. In addition to that, we saw the right numbers. Interest margins expanded, as would be expected with rising interest rates. Bank of America's profits are getting better. Efficiency has gotten a lot better. Their efficiency ratio dropped from 60% to 57% over the past year. Fifty-seven percent is really good for a big brick-and-mortar bank. That puts them definitely in the elite category. In addition to that, they're buying back stock aggressively, like most other big banks are. They bought back more than 2% of their outstanding shares in the first quarter alone. Normally, when companies do a buyback, 2% is a good rate for the whole year. And they did it in the first quarter. That's definitely a big positive. They're doing really good embracing technology and building out their mobile users, which is a big cost saver. Had a lot to do with that efficiency ratio. Mobile banking users rose 9% year over year, and this keeps going up and up and up. It's going to make them very competitive if it keeps going.

Moser: A reminder for listeners, that efficiency ratio, which is a key metric to focus on with the banking industry, it tells us how the bank is managing its expenses. The lower the number, the better, right?

Frankel: Right. That means they're spending $0.57 to generate every dollar in revenue essentially, is what that means.

Moser: All right, makes sense. What about Morgan Stanley, another big bank out there? What'd you see with their recent report?

Frankel: That's another one that beat on both the top and bottom lines. Morgan Stanley's numbers looked really good throughout the business, even compared with some of their competitors. They actually beat expectations for trading revenue, which was a big problem in, say, Goldman Sachs' earnings report. Investment banking revenue dropped but did as well as expected. The big reason for investment banking drop -- this is a key point for investors in Morgan Stanley or Goldman Sachs to know -- merger and acquisitions and IPOs have been in a lull lately. In the first quarter, IPO activity was very low. Now, as the second quarter starts, you're seeing a wave of IPOs. We just saw Lyft a little while ago, Pinterest, Zoom, Uber's coming up. Don't read too much into the fact that investment banking revenue really plummeted during the first quarter. There was a reason for it, but it's looking like a temporary reason. It looks like IPOs are going to be the buzzword for the rest of 2019. It could be a big catalyst for those two banks.

Moser: OK. Looks like a pretty decent start to the year for a lot of the banks that we are covering. Going a little bit across the aisle here into the insurance business, Travelers, which is one that I had as my one to watch last week, I believe, reported. I feel like if you're a Travelers shareholder, then you need to feel really good about the fact that you own these shares. It continues to be a very well-managed business that is not trying to overreach. It's not trying to grow too quickly by writing bad business. Net premiums were up 3%. A good indicator that they're growing, but it's controlled growth. Strong underwriting gains, reflecting that smart decision-making. The underlying combined ratio for the business was 91.6% vs. 92.4% a year ago. We talk about ratios for banks. Well, for insurance, that combined ratio is an important one, because it tells us essentially how well they're writing that book. The lower the number, the better. Anything over 100 tells us basically that they're losing money on the business that they're writing. It's worth noting that the underlying combined ratio that they refer to, underlying means that that excludes the impacts of catastrophes. Catastrophes can make the insurance business a little lumpy. Underlying gives us a little bit more of an idea of how things are going on a quarter-to-quarter basis. Regardless, I think it was a good quarter.

The stock trades around a 1.5 times book value today. I like this company a lot. I think it's a great holding for folks out there wanting to get insurance into their portfolio. I don't think I'd be buying it at today's valuation simply because of the valuation. But I imagine that we'll find a time here sooner or later where that stock will pull back either due to general market conditions or perhaps some events out there that play out on their book that perhaps bring the stock price back a little bit. Definitely one worth keeping on the watchlist there. It's good enough for Berkshire, Matt. We talked about that before.

Frankel: Yeah. Anything good enough for Uncle Warren's good enough for us. At the right price, that is.

Moser: Right, at the right price.