Market commentary: Banks - the Good, the Bad and the Ugly

With the latest earning season coming to an end, we like to take a look at banking sectors that is likely to be in the spot light in the coming months in relation to the monetary policies implementations taking place throughout the year. In fact, banks will surely be affected in different ways by both the EBC QE program starting on Monday 9th March, and a possible interest rate hike from the FED in the second half of 2015.

But how did the banking sector performed in 4Q 2014?

The answer to this question is overall not too bad, but results were quite uneven across the sector. Some banks met expectations, some of them did beat analysts’ forecasts and a few of them really surprise investors by substantially missing market consensus.

The Good: Lloyds Banking Group

The British bank that had to rely on State intervention during the 2008 financial crisis, on Friday 27th February, reported a full year underlying profit’s jump of 26% to GBP 7.8 billion for 2014, driven by a positive net income of GBP 1.5 billion, compared with the 838 million loss reported the previous year.

Although the bank missed the net income analysts’ estimation of GBP 1.8 billion, due to a GBP 700 million charge for improperly sold insurance protection products, the reported earnings were a very good news for investors. And Investors were also rewarded with the announcement that the bank will distribute its first dividend since the financial crisis.

Lloyds will pay a dividend of GBP 0.75p a share which amount to a dividend yield of 0.92%, while the CEO also stated that he plans to bring the bank to eventually paying 50% of its earnings back to shareholders.

The Bad: JP Morgan Chase & Co

JP Morgan Chase & Co, the largest US bank by assets, reported its results for the last quarter of 2014 in mid-January, missing analysts’ expectations on both revenues and EPS. Revenue reported were 2.1% lower than a year earlier at $23.6 billion missing forecasts by $40 million, while the reported EPS for the quarter was $1.19, way off market forecasts of $1.31 per share.

However, the reported EPS was highly impacted by a $990 million after-tax legal charge that made the reported number not comparable with what analysts had estimated. In fact, headline EPS, excluding this particular one-off expense, would have been $1.54 per share and therefore better than expectations.

Nevertheless, the bank reported declining revenues and profit across the board, from its consumer banking division, to its investment banking division, to its asset management business, prompting the market to sell off the stock. Over couple of weeks the stock price has recovered, returning to the $62 level, roughly the same price level witnessed at the beginning of the year. The stock has returned a capital appreciation of 9.12% over the last 12 months.

Yesterday the FED released the results for the US banking sector’ stress tests, and JP Morgan scored a 6.5% Tiar 1 Common Capital ratio against a 5% minimum required by the US Central Bank. CCAR results will be announced next Wednesday, dictating what banks’ dividend and buyback programs will be allow to go through.

The Ugly: HSBC Bank plc

The largest UK and European bank reported on February 23rd and it was a full out disappointing release. The British bank managed to post revenues of $62 billion, slightly better than in 2013, however the bank profit before tax dropped an astonishing 17% to $18.75 billion, largely missing analyst forecast of $21 billion.

The bank reported a net profit for the full year of $13.7 billion, down 15.4% form a year earlier, while the reported EPS was $0.69 per share, also short of market’s expectations of $0.84 per share. In addition, the bank announced that will now target a RoE of more than 10% from a previous guidance of a RoE of more than 12%, highlighting the difficult waters the bank is navigating.

To add to disappointing results, HSBC has also become the latest target of US regulators and the Department of Justice that started a legal probe claiming that the British bank had systematically helped US citizens to avoid taxes throughout it Swiss subsidiary. All these negative news contributed to the poor performance of the stock that has declined 6.5% since the beginning of the year.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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