What happened
Bank stocks rose on well-received earnings reports from some of the largest names in the sector that pointed to a more optimistic outlook than investors had expected.
Shares of Bank of America (BAC -0.21%) traded more than 4.5% higher as of 1:24 p.m. ET Tuesday. Meanwhile, shares of Morgan Stanley (MS 0.29%) traded more than 6% higher, while shares of PacWest Bancorp (PACW) were up roughly 8%.
So what
Bank of America reported second-quarter earnings of $0.88 per share on revenue of roughly $25.3 billion, both numbers that beat consensus estimates.
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CEO Brian Moynihan pointed to a "healthy U.S. economy that is growing at a slower pace, with a resilient job market," and the bank also reaffirmed its $57 billion net interest income (NII) guidance. NII is the money banks make on loans and securities after funding those assets and is a major driver of bank revenue.
Bank of America also turned in solid results in its global banking division, which houses investment banking and sales and trading. The division generated a profit of nearly $2.7 billion, which is up from the sequential quarter and year over year.
Bank of America did, however, see its margin fall by 14 basis points (0.14%) as funding costs continued to rise faster than the bank's asset yields.
Morgan Stanley also reported second-quarter earnings this morning, delivering earnings of $1.24 per share on total revenue of nearly $13.5 billion, both numbers that beat consensus estimates.
Morgan Stanley's second quarter was buoyed by strong performance in its wealth management division, which saw revenue rise 16% year over year and come in ahead of analyst estimates.
Morgan Stanley CEO James Gorman, who has been instrumental in transforming the bank but plans to soon retire, predicts that the bank will eventually triple its assets under management to $20 trillion, as the bank continues to expand its more stable wealth and investment management businesses.
PacWest, which has been one of, if not the most, volatile and hard-hit bank stocks since the banking crisis in March, rose on optimism around the broader sector. The bank will report second-quarter earnings on July 25.
Now what
The banking sector still faces a challenging near-term outlook, as the largest banks prepare for higher capital requirements and there is still a lot of uncertainty around NII, funding costs, interest rates, and when credit will normalize.
But bank earnings season is off to a solid start, as there have been no major surprises yet. I think investors are beginning to get comfortable with Bank of America's balance sheet, which has a lot of unrealized bond losses on it, and the reaffirmed guidance suggests that management has a better handle on funding.
Morgan Stanley continues to execute well on its wealth management strategy, which is showing just how valuable it is in an environment where investment banking is still in the doldrums.
I'm still not ready to buy PacWest, despite the bank making some solid progress recently on asset sales that will help it bolster capital and liquidity. However, its earnings report next week and comments from management should tell the market a lot.
