The New Year has been tough on all stock market sectors. But the bank sector sell-off has been the most disappointing given earlier hopes of their leverage to the Fed tightening cycle. The extended period of low interest rates had effectively robbed banks of their pricing power and the expectation was that a steadily rising interest rate environment will help restore the industry’s power. But that happy narrative has fallen victim to the market’s evolving view of China and the oil market, which has a bearing on the market’s Fed expectations, and as a result interest rates. U.S. treasuries’ safe-haven status is at play in the flattening yield curve as well.

Needless to say that this has been a very unfriendly backdrop for Q4 results from the banking leaders, which have by and large been good enough. No one expected fireworks from J.P. Morgan (JPM – Analyst Report), Wells Fargo (WFC – Analyst Report) and Citigroup (C – Analyst Report) – we knew capital market and underwriting revenues would be weak, net interest margins would be flat at best and core loan portfolios would show some modest gains. Relative to these admittedly weak expectations, they did pretty well, with gains in loan portfolios particularly encouraging. The Citigroup report was somewhat ‘noisy’ that made it difficult to get a good handle on core business, but the J.P. Morgan and Wells Fargo reports reconfirmed why those two banks are the undisputed leaders in this space.

We have plenty of read-throughs from these reports to next week’s results from Goldman Sachs (GS – Analyst Report), Morgan Stanley (MS – Analyst Report) and Bank of America (BAC – Analyst Report). Overall, the going was tougher for the brokers in Q4, and that’s what we will see in the Goldman and Morgan Stanley reports. But the Bank of America report should show most of the positive elements we saw in the J.P. Morgan report. We should expect many of the regional operators that will be reporting in the coming days to show similar momentum in their loan portfolios.

Another issue of lingering concern for the market is the sector’s oil exposure, with many people fearing a replay of the housing downturn of 2008. We saw that J.P. Morgan, Citi and Wells Fargo acknowledged the overhang and provisioned for the eventual losses from their oil loans. We will see this same treatment with Bank of America as well. This could be a major drag for some of the smaller regionals, but this is unlikely to be anywhere as consequential for the major banks as housing was during the crisis.

Banking Scorecard

The ‘Major Banks’ industry, which includes all the major money-center banks like J.P. Morgan and Citigroup, is one of six medium-level industries in the Finance sector and accounts for roughly 42% of the sector’s total earnings. At present, we have Q4 results from 5 of the 15 major banks in the industry, which combined account for 68.9% of the industry’s total market cap. For the Finance sector as a whole, we have Q4 results from 7 of its 85 members that combined account for 27.2% of the sector’s total market cap.

Total earnings for these Finance sector companies that have reported results are up +25.8% on +1.4% higher revenues, with 71.4% beating EPS estimates and 85.7% beating revenue estimates. The table below shows the sector’s Q4 scorecard at the medium-industry level.