The quarter was very similar to Wells Fargo & Co (NYSE:WFC) in terms of margins and credit quality. Net charge-offs continued to decline to $1.5 billion, down greatly from $2.3 billion just last year. Unfortunately, net interest margins dropped by a whopping 137 basis points, greatly affecting net interest income. Although NII fell by 7%, strength seen out of the mortgage origination business segment (12% growth) hinted at a turnaround in the quarters ahead. Going forward, JPMorgan Chase & Co. (NYSE:JPM) stands in a strong position to take advantage of higher interest rates and return money to shareholders. As interest rates rise, expect to see the company generate higher NII. Lastly, additional shareholder dividends seem possible with the $3.7 billion increase in Tier 1 capital.
The broad basket
As I’ve mentioned in articles earlier this year, the Financial Select Sector SPDR ETF is a good and liquid fund for exposure to the entire financial services industry. Its top three holdings happen to be JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), and Berkshire Hathaway Inc. (NYSE:BRK.A). Exchange traded funds, if you’re not familiar, offer the diversification of age-old mutual funds while giving you the ability to transact in them as you would any other stock. The management fee, 0.18%, is well below the industry average, allowing investors to save money over the long term. By avoiding the commissions associated with purchasing the entire sector separately, you will save a great deal of money. As with the two previously mentioned companies, this fund stands to benefit from numerous tailwinds going forward. As credit quality and interest rates rise, everything from credit, to mortgage, to real estate investments trusts will benefit over the long run.
Wrap-Up
While earnings season is just getting started, a number of financial names have reported positive earnings during a difficult environment. I would like you to consider picking up a financial company if you currently don’t have exposure to the sector. All three investments vehicles will benefit from two major tailwinds sweeping the sector. As interest rates rise during a period of improving credit quality, the financials will generate higher net interest income.
The article Financials Kicking off the Season originally appeared on Fool.com and is written by Nathaniel Matherson.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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