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Banks Q4 2014 earnings indicates difficult 2015

Last week major banks such as J P Morgan, Citi, Bank of America, Wells Fargo and Goldman Sachs declared their earnings for quarter ending December 2014. The results fell short of investor expectation for all the above banks except Wells Fargo. The story continues to be the same. Ligation costs continue to drag the earnings. The fine print shows that most of the banks are following similar strategy in face of difficult business environment, litigations and regulatory headwinds.  All are strengthening their core business, selling off non-core assets and reducing cost. Investment banking continues to be a drag and most affected is Fixed Income, Currency and Commodities (FICC) trading business. In the last quarter, most traders were caught on the wrong side of oil and US Dollar trade. The Swiss National Bank’s decision to abandon defending Swiss Franc Euro rate has added more misery which will be known in next quarter earnings. There are unconfirmed reports of Citi and Deutsche bank losing around 150 mn USD.  The bright spots for banks were growth in consumer loans, mortgages, cards and wealth management business. Banks are investing in growing these businesses and it is paying off. But the earnings growth isn’t enough. The ROE continues to be in single digit and below cost of capital.  

The biggest trigger for banks in 2015 was rise in interest rates. There was expectation that FED and Bank of England would raise interest rate somewhere in middle of 2015. Banks have positioned themselves to benefit in an increasing rates environment. The unexpected fall in prices of commodities, especially oil has changed the inflation outlook for 2015 and it looks less likely that interest rates will rise in 2015. Banks will have to grind out another year in record low interest rates, ligations and regulatory headwinds.  Would investors be patient enough to wait another year for earnings growth?

The recent total loss-absorbing capacity (TLAC) proposal would require globally systemically important banks (G-SIBS) to hold more capital. There could be pressure from activist investors to break banks into smaller businesses. Would banks oblige or try to keep activities at bay through another round of cost cutting?  Time will tell. 


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