It’s been very difficult to come up with a cohesive theory on what this earnings’ season has meant for the financial sector – and what investors’ reactions could mean for the credit markets. On Wednesday, Morgan Stanley reported earnings of 80 cents a share, crushing analysts estimates and sending its shares up 8% by mid-morning. At the same time, US Bancorp released an earnings report reflecting a 63% quarter-on-quarter increase in profit. Rounding out the morning, Wells Fargo reported an earnings rise of 12% ($0.55 eps vs. an estimate hovering $0.48 eps) and was rewarded with a pre-market rally of close to 5%. Good times.
But these numbers stood in stark contrast to the news a couple of days ago, as Citigroup beat earnings expectations but nonetheless saw its shares price drop. Citi met the bottom line, but missed at the top. The message: investors are increasingly less concerned with bottom line results – something that can be assuaged with cost-cutting and the shifting of one-time charges – and are focusing instead on top line (read: making money). Goldman Sachs did miss and was commensurately punished. But that may not be the whole story – after stripping out the $550m paid to the SEC (something touted as a “win” for the SEC, although it’s clearly a loss for an already slumping credit market), the miss didn’t look nearly as bad. But GS revenues were down 36% – and investors took notice. Conversely, the winners this season tended to be able to demonstrate the ability to grow by getting deals done.
In a lot of ways these greater investor expectations are a positive sign – the market’s appetite is no longer sated by mere survival. But what the investors are demanding now – that the financials go out and spark the credit markets – is a tall task in an environment dominated by high unemployment, continued de-leveraging, and a government policy designed to avoid catastrophe at the expense of generating opportunity. The obstacles to sustained growth being constructed by the government can’t be overstated – something Bank of America shareholders learned when the market departed the stock in droves after an earning report admission that compliance with Dodd-Frank could cost the bank $13 billion. But it could provide incentive for deals to be made (note that US Banc’s increased revenues were reportedly driven by earnings from new loans) and for banks to re-enter lending in greater numbers.