The push to break up big banks continues, but earnings reports from JPMorgan Chase and Goldman Sachs are evidence that bigger is better, according to MarketWatch.
JPMorgan and Goldman Sachs are examples of banks that are considered too big to fail. Critics not only have a problem with their size, but also argue that the firms are too complex.
MarketWatch says the firms' earnings reports are a testament that diversity pays, as both banks beat analysts’ expectations and saw their stock prices rise this week.
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
This was in contrast to a slew of other banks that saw their share prices punished after reporting quarterly results, as investors pay close attention to a metric known as net interest margin.
Smaller banks tend to be heavily dependent on interest revenues, which is not the best position to be in when the Federal Reserve has pledged to keep interest rates low.
Banks earn interest on products and services such as credit cards and mortgages. Thus, higher rates equal more revenue while lower rates produce less revenue. Banks also pay interest to their depositors and to their creditors. The difference between interest received and interest paid is the net interest margin (NIM).
Take a bank such as Wells Fargo. Mortgages, loans and credit cards are responsible for half of its value, according to Forbes. But the institution's clients are making more deposits, thereby saving more, than they are spending and borrowing. This means Wells Fargo is seeing its interest payable rise as interest earned declines. Investors are not ignoring that trend, as the bank's falling share price clearly reflected.
Other financial institutions, such as Capital One, Citigroup and Bank of New York Mellon, have experienced the same problem. The decline in stock prices witnessed across the industry underscores how important NIM is, says Forbes.
Looking at Goldman Sachs, one recognizes the benefits of being less dependent on interest revenue. MarketWatch says the firm saw strong gains from underwriting and financial advisory fees. The $500 million profit from the sale of a hedge fund-administration unit also gave the company a boost, Bloomberg reported.
JPMorgan saw its investment banking revenue double, but the firm also benefited from other factors such as lower credit-loss provisions and improved credit quality.
“Diversification counts in an era of low rates,” Nancy Bush, an analyst and contributing editor at SNL Financial, tells MarketWatch. “Net interest margins are getting hammered and you have to offset the NIM pressure with volumes.”
Bank earnings this season have been “goodish,” Bush notes, adding that it really depends on whether the firm’s businesses are diversified enough to balance trends.
“If you’re in the asset management space, it’s not a great place, but if you’re JPMorgan, you’re okay.”
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
© 2013 Moneynews. All rights reserved.