What's going on?
Major US banks including JPMorgan Chase, Citigroup and Wells Fargo reported first-quarter earnings on Friday that beat expectations – but investors didn’t seem to be that into it…
What does this mean?
There was plenty to be pleased about in Friday’s results: recent tax reforms have helped increase profitability at the banks, and rising interest rates mean that they’re earning more from lending out money to customers. On top of that, markets’ roller coaster ride in the first quarter helped banks’ stock-trading departments add to their revenues as they executed more trades (banks charge a small commission for each trade they process).
Why should I care?
For markets: It appeared that markets were already expecting all that.
Shares in JPMorgan fell by more than 2%, Wells Fargo was down 3% and Citigroup was down 2% on Friday. Bank stocks have generally increased some 20-30% over the past two years as investors have bid up their price, enticed partly by moves like frequent share buybacks and partly by the rising interest rate environment. The lack of anything especially shiny and new in this batch of earnings – and some disappointing news on lackluster loan growth in spite of tax reforms – may have encouraged the selloff.
The bigger picture: Trading just ain’t what it used to be…
While JPMorgan reported record revenues from its stock-trading division, banks’ revenues from trading as a whole have been declining for years. One interesting reason is that regulators around the world are pushing for more transparency in financial markets. In Europe, for example, the recent MiFID regulation ensures that all kinds of financial products are priced in an open and transparent way. This is probably good for society in the long run (honesty is the best policy!), but it does mean that banks might find it harder to overcharge for certain products (as, in theory at least, anyone can figure out if they’re paying a fair price).