Financial Professionals

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Corporate Earnings – Financial Sector

10/19/2011
Financial institutions, when measured in terms of their dismal year-to-date equity price performance, appear eerily similar to the summer of 2008 when cash was about to be king and the Great Recession was confirmed.  The Financials Select Sector SPDR ETF (XLF) is down nearly 20% year to date, with capital market institutions down close to 25%.
 
Financial regulatory reform and continued consumer deleveraging are limiting the financial sector’s earnings growth potential. In fact, over the past few months, multiple analysts have cited those as reasons for an impending second recession. I disagree with that premise, however. While owning the equity of financial institutions might not have been a favorable investment heading into October, the improvement in financial institutions’ balance sheets suggests that owning their debt is the favored investment strategy.
 
With October earnings season underway, financial institutions’ current earnings are the best indicator that the “coming recession” analysis is incorrect. What has been reported so far is not consistent with the financial earnings reported in the summer of 2008 that telegraphed the Great Recession of that year.
 
Let’s take a look at the facts . . .
 
  • 19 of 81 S&P 500® financial companies have reported this quarter
    • Average EPS growth is +8.26% vs. July 2008 -52.35%
    • Average sales growth is -.09% vs. July 2008 -6.70%
  • Commercial Banks
    • Average EPS growth is +14.93% vs. July 2008 -47.91%
    • Average sales growth is -1.66% vs. July 2008 +9.99%
  • Wells Fargo contributed -3.55% sales growth to the average decline of -1.66%
  • Diversified Banks / Capital Markets*
    • Average EPS growth is +10.39%, vs. July 2008 -64.75%
  • Bank of America (BAC) – Average EPS growth is +0% vs. July 2008 -42.31%
  • Citigroup (C) –  Average EPS growth is +75.71% vs. July 2008 -50%
  • JP Morgan (JPM) –  Average EPS growth is + .99% vs. July 2008 -55%
  • Capital Markets [Morgan Stanley (MS) & Goldman Sachs (GS)] – EPS growth is -8.34% vs. July 2008 -55%
    •  Average sales growth is + .29% vs. July 2008 -5.92%
  • BAC  Average sales growth is +6.37% vs. July 2008 +3.84%
  • C  Average sales growth is +. 45% vs. July 2008 -29.96%
  • JPM  Average sales growth is - .26% vs. July 2008 +6.68%
  • Capital Markets (MS & GS) sales growth is -5.77% vs. July 2008 +16.03%
 
*Keep in mind:  During the July 2008 quarter, MS and GS earnings were bolstered by strong trading revenue in particular, as oil prices averaged $123.80 for the quarter. Their ability to assume market risk on their proprietary trading desks was far greater than the current Dodd-Frank environment permits.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.