What happened
Bank stocks continued to climb as more earnings reports came out today, and investors got more bullish on the economy and took advantage of cheap bank valuations.
Shares of U.S. Bancorp (USB 0.32%) traded roughly 5.7% higher as of 1:43 p.m. ET today. Meanwhile, shares of Northern Trust (NTRS -0.07%) traded roughly 14% higher, while shares of KeyCorp (KEY 0.62%) were up about 6%.
So what
U.S. Bancorp reported adjusted-earnings per share of $1.12 on total revenue of roughly $7.2 billion, both numbers that narrowly beat consensus estimates.
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The bank saw net-interest income (NII), the money banks make on loans and securities after funding those assets, come in 4.7% lower from the first quarter of the year as the bank's funding costs continued to rise faster than its asset yields. U.S. Bancorp also saw its margin compress by 20 basis points (0.20%) from Q1. Management provided full-year NII guidance that came up short of expectations.
But a major positive in the quarter is that the bank managed to raise one of its key regulatory-capital ratios. U.S. Bancorp's common-equity tier 1 (CET1) capital ratio, which measures the bank's core capital expressed as a percentage of risk-weighted assets, jumped from 8.5% in Q1 to 9.1% at the end of Q2. Investors have been concerned about the bank's capital levels, and the bank had not been previously expected to get its CET1 above 9% this early in the year.
Northern Trust also reported earnings this morning, delivering earnings per share (EPS) of $1.56 on total revenue of roughly $1.77 billion. Earnings missed estimates, while revenue beat.
Like most banks, NII and the bank's margin fell in Q2, but Northern Trust reported a solid increase in assets under custody/administration in both its asset servicing and wealth-management divisions.
KeyCorp will report earnings tomorrow but has been one of the harder-hit super regional bank stocks in its peer group this year, so it is moving on broader optimism in the sector and the earnings reports this morning.
Now what
Banks' Q2 earnings reports are by no means perfect. Many banks are still dealing with higher funding costs, and this could continue because there is a lag in deposit pricing, so even when the Federal Reserve eventually stops hiking rates, deposit costs are still likely to move higher in the months following.
But most investors have been anticipating this, and the good news right now is that the economy and the consumer still appear to be on solid footing, and banks are not yet dealing with significant credit issues -- not that those aren't expected to come.
The price action this week comes from the fact that there haven't yet been any major surprises, and banks have been trading at very cheap valuations to where they have historically. I do think many are going to be able to ride out this more challenging near-term environment.
Of this group, U.S. Bancorp looks very well positioned right now. The capital build will alleviate some of the concerns investors have had, and the bank still has close to a 5% annual-dividend yield.
