After their spectacular fall, U.S. banks are experiencing a renaissance of sorts.
In the past year shares of Citigroup Inc. climbed 93 per cent, while Goldman Sachs Group Inc.'s jumped 67 per cent and Bank of America Corp.'s soared 80 per cent.
The question now is whether investors have reason to hop aboard these rocket ships, or if they're too late to the party. The current bank-earnings season, which kicked off on Friday, is bound to shed some light.
For the past few quarters, economic fundamentals that directly impact the banks' bottom lines have been looking up – and the hope is that they will only improve. The U.S. economy is back on solid footing, growing faster than Canada's, and consumer confidence is ticking higher.
On top of that, the country's housing market is quickly roaring back to life, with May housing starts soaring to 914,000 units, implying a contribution of nearly $230-billion (U.S.) to the economy, according to analyst Gerard Cassidy at RBC Dominion Securities.
The scorching U.S. stock market has also given companies reason to strike new deals – evident in the return of blockbuster buyouts of companies such as HJ Heinz Co. and Dell Inc. – which should boost the bottom lines of investment banking units.
These very factors contributed to JPMorgan Chase & Co.'s solid earnings Friday, which offered a taste of what the rest of the season has in store. The bank made $6.5-billion last quarter, or $1.60 per share, much higher than the analysts expectations of $5.5-billion.
The three remaining major U.S. banks report in this order: Citigroup on Monday, Goldman Sachs on Tuesday, and Bank of America on Wednesday.
When they do, all eyes will be on the pace of their loan growth. Though the U.S. economy is recovering, businesses still aren't borrowing as much as the banks would like, and that's slowed their revival because lending typically comprises such a huge portion of their balance sheet.
This slow pace also hurts how much the banks make on each loan. Because fewer businesses are borrowing, the banks have to compete for the available opportunities and that forces them to lower the interest rates they charge.
This very concern showed up in JP Morgan's results, with chief executive officer Jamie Dimon acknowledging on the bank's conference call that loan growth was "soft."
Yet the banks are starting to be able to rely on rising bond yields to help offset this problem. Since early May, longer-term government bonds have seen their yields skyrocket, and these rates serve as the benchmark prices for all loans. Even if the banks keep undercutting each other to win new business, the higher benchmark yields limit just how low they can go.