(GS) Banking on a Turnaround? – Investment Ideas

Can we really have a rally without the financials?

Earnings have been mixed for the financials. Let’s take a deeper look at the players in each segment and see if we can’t come to a consensus as to whether or not a rally can be supported. The Zacks Rank for most of these banks is a #3 Rank (Hold) with only Goldman Sachs (GS) having a Zanks #5 Rank (Strong Sell).

Investment Banks

The capital markets have been weak, especially with the “IPO window” getting slammed shut around the time that Groupon was looking to make its public offering. Goldman Sachs (GS) beat on the bottom line but missed on the top line and saw revenues decline 30% year over year. The beat was the result of significant cost cutting. Morgan Stanley  (MS) posted a lower than expected loss but also saw revenues decline by 26%. So the investment banks were weak on the top line and beat on the bottom line due to low expectations. Not much has changed in the way of expectations for that market since the reports.

The big money center banks

The big money center banks are national players in nearly every category. Through mergers over the last several years, these banks end up competing with nearly every financial institution in every segment. Bank of America (BAC)posted growth of almost 11% but missed on the bottom line.  Cititgroup (C) missed, and missed badly as revenues fell 6.4% from the prior year.  Wells Fargo (WFC) met expectations on the bottom line and saw revenues fall slightly. WFC noted that the lending environment is getting better. JPMorgan (JPM) missed both the top and the bottom lines, and revenues were lower by 17%.

Regionals or smaller banks

Regional banks are smaller than the money center banks and focus much more on the retail side. Deposits and smaller lending are much more important to the banks in this segment. M&T (MTB) missed on the bottom line but had strong top line growth. The bottom line miss came from mortgages and a one time item.  PNC Financial (PNC) saw bigger revenue losses and was also missed on the bottom line. BB&T (BBT) beat on the bottom line with 3% topline growth.

Custodial Banks

Custodial banks generally hold money and securities for asset managers and other players in the financial industry. They tend to be highly commercial focuses as opposed to retail focused. Bank of NY (BK) missed on the bottom line and saw revenues decline by almost 6%.  State Street (STT) missed by a penny on the bottom line a but saw revenues increase almost 12% from the year ago period.

Analysis

To say the least, the picture is not clear as to how the group is doing. Asset Managers will add clarity to the picture, but they will only be one component in a bigger sector. We learned that lending is getting better, the capital markets are not doing well and trading slowed in the quarter. The key from all of this is, are businesses looking for and getting loans to expand.

Conclusion

Some parts of the industry are weak and others are showing some strength. At the end of the day, we need almost all of the segments to show either strength or no growth as opposed to continuous weakness. Without that a sustained rally can happen, but it will be much harder.

Brian Bolan is the Aggressive Growth Stock Strategist for
Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service

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