According to the Wall Street Journal, the U.S. banking industry posted record profits at the end of the first quarter. The record profits are a signal to the industry’s recovery after the 2008 financial crisis. However, the Federal Deposit Insurance Corp does not support the thesis. It believes the banking recovery is still hampered by a stubbornly low interest rate environment, coupled with a weak demand for loans. Further, it believes the first quarter profits were largely due to one-time items. I believe loans growth is one of the key matrices that define the actual growth in the bank’s results. The remainder of the investment thesis aims to explore the contributions of one-time items in the results of the three largest banks. Also, I will attempt to determine the future outlook of the interest rates.
Banking profits soar
The first quarter of the current year saw a 16% increase in the banking industry’s profits over the prior year. Banks’ profits touched $40.3 billion, with around 31% coming from America’s three largest banks: JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), and Citigroup Inc (NYSE:C).
JPMorgan Chase & Co. (NYSE:JPM) reported a 34% year-over-year increase in the profits, while Bank of America Corp (NYSE:BAC) reported a three-fold increase. Citigroup Inc (NYSE:C) also reported a 30% increase in profits over the same time period.
Let’s look at the sustainability of these profits. One way of determining that is to see how much of the profits were coming from one-time items.
On a per-share basis, JPMorgan Chase & Co. (NYSE:JPM) recognized its $1.59 per share earnings were boosted by its reduced mortgage loan-loss reserves and reduced card loan-loss reserves. The boost accounted for around $0.18 in the EPS. So, over 11% of the first quarter’s earnings were due to one-time items. Similarly, 50% of Bank of America Corp (NYSE:BAC)’s first quarter income per share came from one-time items, as the bank reported adjusted EPS of $0.20 per share, while the actual EPS was $0.10 per share.
For Citigroup, the one-time items had a negative impact. This means that, rather than providing support to the bottom line, the one-time items were a source of erosion. Excluding the one-time items, Citigroup’s net income came in at $1.29 per share, compared to $1.23 per share with the one-time items.