Now that we're well into earnings season, we've had a chance to see how the big banks fared during the third quarter. We asked three of our contributors to shed some light on the things they noticed in the big banks' earnings; here's what they had to say.
Jordan Wathen: It's abundantly clear: banks that rely mostly on interest income are getting pounded. Net interest margins -- a measure of what a bank earns on its loans minus what it pays on its funding -- continue to trend lower and lower.
Three major banks, JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) reported net interest margins of 2.1%, 2.2%, and 3%, respectively, when they reported earnings. This is hardly a new problem for America's banking institutions. The Federal Reserve reported that the aggregate net interest margin for American commercial banks fell to 2.97% in the second quarter of 2015, down from a peak of 4.91% in 1994. Though there have been some ups and downs, the trend is quite clear: Margins are falling.
For investors, this highlights some important opportunities for bank investors to pick good bank stocks. First, it seems unlikely that rates will go much lower, and thus it's likely bank earnings are probably at their worst ever, and yet, thanks to cost-cutting and strong credit metrics, earnings are relatively good. Secondly, it highlights the importance of a bank's revenue mix. Banks that have a higher mix of non-interest revenue from account maintenance fees, brokerage, or card processing are much better banks to own in a low-rate environment like today's.
Matt Frankel: One thing I'm happy to see so far in bank earnings is the trend toward cost-cutting and improving efficiency.
For starters, JPMorgan Chase has been actively cutting costs for some time now, ending the third quarter with 142 fewer branches and 10,000 fewer employees than it had at the beginning of the year. Bank of America has shed more than 14,000 employees and has cut its branch network to 4,741 -- down from about 6,200 just a few years ago. Also, Citigroup (NYSE:C) has aggressively cut its physical footprint, with its branch count declining by 13% over the past year.
Banks are figuring out that they can operate more efficiently by relying more on online and mobile banking, and less on physical branches. Bank of America's CEO Brian Moynihan recently said that it costs 90% less to process a mobile transaction than a branch-based one. JPMorgan, Bank of America, and Wells Fargo all reported double-digit annual growth rates in mobile banking users, and Citigroup is actually creating a new unit called Citi FinTech, with the goal of creating a revolutionary smartphone-based mobile banking system to be introduced by the end of 2016.
The use of technology to improve efficiency has the potential to significantly increase profitability, so it's definitely worth watching to see if this trend continues.
Dan Caplinger: One trend I've noticed with bank earnings this quarter is that the expected declines in mortgage banking income haven't been nearly as bad as one would have thought. For instance, Wells Fargo reported mortgage banking income of $1.59 billion in the third quarter, down just 3% from the year-ago quarter. Bank of America actually reported a 13% increase in mortgage and home equity loan originations to $17 billion, and the bank has been adding mortgage loan officers over the past 12 months. U.S. Bancorp (NYSE:USB) has seen a somewhat more dramatic shift, with mortgage banking revenue falling 14% year over year, but the bank cited an unfavorable change in its mortgage servicing rights valuations as the primary cause for the decline.
Fears of rising interest rates had many bank analysts figuring that the mortgage business would essentially be dead in the water for a number of years, with perhaps one last wave of refinancing and purchase activity to lock in low rates before they disappeared forever. Yet the Federal Reserve has been slow on the uptake in pushing rates higher, and now, some economists think the Fed will continue its accommodative monetary policies much further into the future than previously believed. That could help banks preserve -- and even build on their mortgage businesses both for the rest of 2015, and in the years to come.