Collectively, about 45% of us use one of these banks, they are the Big 4 US Banks: JP Morgan Chase, Wells Fargo, Citigroup and the Bank of America.
And it's no accident that these 4 banks lead off the “official” beginning of earnings season each quarter. They are that important to our financial system.
Collectively they have 9 Trillion in Bank Assets, not counting their custodial and trading functions. Both of which would increase those numbers geometrically.
The Federal Reserve, the nation's central banker, uses these four institutions both to measure the health of the overall banking system and to implement various fed policies.
So, as investors, it is important that we always keep an eye on these 4, even if they don't happen to be in our portfolio currently.
Earlier this week all 4 reported their results for last quarter, and here is what we saw.
In earnings a mixed result from the four. From JP Morgan Chase record revenue of 36.4 billion. But on the opposite end of the scale, Wells Fargo continued to report declining revenue, down for the 3rd year in a row.
With both the B of A and Citi reporting results somewhere in between.
But behind these numbers, lies three important trends for us Bank Watchers.
Trend number 1 was the reduction in the Banks Net Interest Margins. This was across the board and affected all of the Banks. The recent move by the Fed to lower interest rates is biting everyone. And so all four must deal in an environment of tight profit margins.
And this realization is the reason, I believe, that we are seeing some of the other strategies adopted by the banks.
Trend Number 2 is a strategy that naturally comes from those lower profit levels. It is the trend, by all the banks, to continue to dedicate much of their income to their stock buyback programs.
Both Wells Fargo and The Bank of America put $9 billion into stock buybacks.
In fact, in spite of B of A's lower revenue for the quarter, they were able to report enhanced earnings per share. ONLY because there were fewer shares outstanding, the result of the B of A's stock buyback program.
Finally a strategy has been adopted by JP Morgan Chase, which I feel will likely expand to the other three.
Jamie Diamond, and the management of Morgan has begun, it looks to me, a process of lengthening their maturities. Remember longer maturities come with higher interest. We see this most clearly in looking at their latest 10Q. The balance sheet shows that Morgan has increased its “investment” securities by 50%.
Now I may be wrong about this point, but it sure looks to me like Morgan is moving its weighted average maturities longer and longer Reaching for those higher yields.
Now, if I'm right about this, then it might explain some of the actions that the Fed took over the last few months in the repo markets.
For any bank with longer-dated maturities in their portfolio, it's possible to hit a liquidity squeeze. A point where your cash on hand does not meet current requirements.
This point is just speculation on my part, but it will be an interesting point to follow in the months ahead.
Overall the banks are telling us that they expect lower interest rates for the foreseeable future. And that, in turn, will mean continued low Net Interest Margin for them.
So to meet that challenge the Banks have adopted a couple of strategies to meet this challenge: stock buybacks, and perhaps farther out maturities in their investment portfolios.