Bank Earnings: Better for Bondholders than Stockholders

Fourth quarter and full year 2014 earnings reports kicked-off last week with most of the large U.S. banks reporting results. Headlines pointed to weakness across the board, with both revenue and profits falling year-over-year as the low interest rate but high volatility market environment dampened results. The banking subcomponent of the S&P 500 fell by 3.5% on the week versus the overall S&P posting a 2.3% decline. However, financial publication doom and gloom and equity market price action often mask what truly matters for bondholders, the condition of the balance sheet, and on this front things are looking up. JP Morgan, for example, saw loan delinquencies fall or remain low across their home equity, prime and subprime mortgage, and credit card lending books. Loss reserves are double their non-performing loans, and both capital and liquidity ratios remain strong. Despite this, credit spreads in the sector, which had widened substantially in the last few months, continued widening last week (see chart below). As we mentioned on our year-end call, we see this as an opportunity to add positions in strong credits whose bonds are being negatively affected by overall market volatility.

Source: Barclays Capital, Bloomberg