Expense Management the Focus for These Banking Stock
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Citigroup (NYSE: C) and Bank of America (NYSE: BAC), two widely followed stocks, reported their earnings for the fourth quarter of 2012 on Jan. 17. Soon after the announcement both fell 3% and 3.5%, respectively, while regionals flew higher. In contrast, Morgan Stanley’s (NYSE: MS) shares were up 3% after the announcement of its performance for fourth quarter.
Bank of America reported a bottom line of $0.7 billion or $0.02 on a per share basis. This included several one-time items, excluding which the core EPS came closer to $0.21 per share. Core or adjusted revenues of $21.7 billion came in below Credit Suisse’s expectation on lower fee income, while spread income of $10.6 billion held up, driven by a 2% sequential improvement in net interest margin. The net interest margin improved on better liability management which brought down funding cost. The bank managed its expenses well as its operating expense fell 2% year over year. However, operating efficiency remains elevated at 74.2%. Credit quality improved as NPAs declined 5% compared to the prior quarter. Capital position improved during the quarter. The bank estimates a Basel III tier 1 common ratio of 9.25%, up 28 basis points.
Citigroup reported a bottom line of $1.2 billion or EPS of $0.38. Adjusting for one-time items, the EPS comes out to be $0.69, $0.3 below Credit Suisse’s expectation. The results were light of expectations due to $1.3 billion litigation expense and lower trading profits, partially offset by healthy Global Consumer Banking (+4% y/y) revenues. Total reported revenues of $18.2 billion also fell short of estimates. The shortfall was blamed on weaker revenues in ICG and FICC trading. Adjusted expense of $12.5 billion edged up 3% quarter over quarter due to higher than expected other legal costs. The management at Citigroup expects expense re-engineering programs in an environment where revenue growth is challenged. While the Basel I tier 1 ratio stood at 14.1%, the Basel III tier 1 common ratio improved 10 basis points to 8.7%.
Morgan Stanley reported an ex-DVA EPS of $0.45 on ex-DVA revenues of $7.5 billion, both exceeding their respective estimates. The adjusted revenues were 2% above the revenues of the same quarter of 2011. The improvement was associated with better than expected Institutional Securities and solid expansion in Global Wealth Management margins. Investment Banking results surged 26% from the linked quarter on robust M&A and debt underwriting, which improved 34% and 19%, respectively. While revenues from core equities trading were 4% sequentially, revenues from fixed income sales and trading were challenged. Global Wealth Management revenues increased 4% over the prior quarter with higher operating margins, supported by higher investment banking fees, trading commissions and asset management fees. Net revenues from Asset Management were down 5% over the linked quarter. The management did a solid job in managing the expenses during the quarter. Compensation expense as a percentage of revenues dropped from 52% to 49%. The bank’s capital position remained strong, as its Basel I tier 1 common ratio improved 60 basis points to 14.5%, while the Basel III tier 1 common ratio estimate stood at 9%
Foolish Bottom Line
My view is that 2013 will be a revenue challenged year for the US banking sector. Therefore, expense management will be a focal point. Banks with effective expense management programs will experience improvement in results. Additionally, banks with exposure to the US housing sector will flourish. WFC is considered to originate a third of America’s housing loans, which is why it is Warren Buffett’s favorite banking stock. Therefore, in my opinion investors should invest in banks with effective expense management programs coupled with reasonable exposure to the US housing sector.
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