Friday, April 16, 2010

The Delicate Dance of the Banks

So now we have Bank of America's (BAC) earnings in hand as well. Like JPMorgan (JPM), they were better than expected, though not as strong on a relative basis. Like Morgan, BAC saw weak loan growth, good i-banking revenue, and very good trading revenue. There were also continued large reserves taken for the mortgage business.

This is a very delicate little dance we have going on here.

Trading is a fickle business and that revenue could go away fairly quickly; whether from rising interest rates, a federally-imposed restriction on proprietary trading, less volume, or what have you. The recovery in credit cards could also go away quickly if the economy takes another leg down. Last and not least, commercial lending has held up despite everybody's expectation and while that's not as large a business for the JPM/BAC size of bank (relative to the big regional banks), it could mushroom into a big problem.

What it all boils down to for me is this - the easy money in American bank stocks has been made. The economy will get better, bank earnings will improve, and bank stocks have room to go up. But whereas buying bank stocks 18, 12, or even 6 months ago was a decision where you were exploiting excessive fear in the market, that cushion is gone.

On the flip side, the insurance industry hasn't been getting all that much love, but that's a topic for another day...

(disclosure: I own JPMorgan shares)

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