Though investment banks have still not fully repaired their tarnished reputations, and are still dogged with trading violations and SEC sanctions, there is no denying that they are making money. So much money, in fact, that if trends continue, Financials will overtake Tech and once again become the most valuable sector of the S&P 500.
At the low point of the global financial meltdown, the value of the Financial sector plummeted from $2.4 trillion to just $510 billion. But the performance of Financials have been driven upwards by exceptional second-quarter 2013 earnings by the Big Four.
JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. ($WFC) both beat expectations handily, with JPMorgan posting a 14-percent jump in quarterly revenues. Citigroup Inc. (C) was buoyed by their emerging market investments, and also comfortably beat expectations. And Bank of America Corp. (BAC) crushed, raising quarterly profit 70 percent.
Financials is gaining on Tech fast. At the beginning of 2013, the Financials sector lagged behind Tech by 3.5 percent. By July, the gap had narrowed to 1 percent. At the current rate, by the end of the third quarter of 2013, Financials will be the most valuable of all of the S&P’s 10 sectors.
A lot of the newfound success of Financials can be attributed to the lessons they learned from the financial crisis. Bank of America has shed a sizable chunk of the bad mortgages they acquired during the housing crisis, and reports suggest they are shedding those toxic loan assets ahead of schedule. Going forward, the bank cut their fourth-quarter forecast for bad debt costs by $100 million.
JPMorgan as well has rid itself of $1.5 billion of the bad credit card and loan debt that had been dragging them down for years. In some ways for the Big Four, the worst of the crisis is over.
But while many of the bad assets themselves have been cleared off the Big Four’s dockets, litigation over the events that caused the bad asset’s existence has not.. Estimates for JPMorgan’s litigation costs stemming from their $6.2 billion trading loss due to the “London Whale” debacle could top $3.8 billion.
JPMorgan expects to bring in close to $100 billion in total revenue this year. So while $3.8 billion is nothing to shrug off, it might not be enough to stop Financial’s meteoric rise.
(Image courtesy of Wikimedia Commons)