Rising above debates on regulations and their impact on the banking sector, the top U.S. banks have brought in aggregate profits close to their pre-crisis peak. That happened amid a far less lenient regulatory framework compared to before the crisis.

To curb excessive risks taken by financial institutions, the previous government made sweeping changes in regulation following the 2008-09 financial crisis. Now, Donald Trump wants to scrap most of that. Over the past decade or so, U.S. banks have been in an environment where not every piece of financial regulation could be expected to be written in stone. Sure, that did have some changes in banks’ financial ratios. But, as far as earnings go, the latest quarter’s results affirm U.S. banking sector’s grit to bounce back from one of the biggest financial collapses in history.

In Q2 2017, the top ten U.S. banks have together earned $30 billion – falling short by just a few hundred million from the Q2 2007 level, according to a Bloomberg report. The trailing 12 months figure is $115 billion, not too far off from the Q2 2007 peak of $117 billion (according to Bloomberg). The ten banks with the largest profits now make $57 million of profit per working hour, according to the report.

Can Policy Shifts Restrict Banks’ Profits?

Following the crisis, regulators imposed stricter policies on derivatives trading and set up higher capital requirements – reforms intended to avert potential vulnerabilities, but at the same time raised concerns of limiting banks’ money-making avenues. The latest quarter’s earnings figures should be more than comforting, especially in conjunction with this year’s stress tests’ results (for the first time, all 34 banks passed the tests).

Even though revenues at banks’ trading desks lagged behind, profits from other operations more than made up for it.

Due to reduced volatility in markets in recent times, banks probably saw fewer arbitrage opportunities from fixed-income and/or equities’ trading. For instance, JPMorgan saw trading revenues decline by -14% and Citigroup’s down more than -7% in Q2 2017 from a year ago, as reported by Bloomberg.

On the other hand, many such banks experienced solid upsides in loan growth and earnings from asset/wealth management services. Wells Fargo saw the year-over-year profit from wealth & investment management climb +17% in Q2 2017; JPMorgan’s increased +20%; while, Bank of America’s made a +14% jump. Many of these banks reached record high earnings from this division

As for lending, albeit slower than their 2001-2007 pace, net loans rose by a healthy +11% from 2011 through Q1 2017 (according to data compiled by Bloomberg from the Federal Deposit Insurance Corp.).

Bottom Line for Investors

Following the historic financial crisis of the late 2000s, the sector which got hit the hardest and probably had the most to prove was U.S. Financial. So, the latest quarter’s earnings of the biggest banks should come as a major vindication for Wall Street.

When it comes to policies and regulation, there may be changes (and counter-changes) from time to time. That means, there could be potential challenges ahead for the banking sector. Nevertheless, what should determine the sector’s long-term potential are its fundamentals. That’s why, at Zacks Investment Management, we leverage our in-house research and tools to help investors stay up-to-date on the fundamentals.

At the same time, we also make sure our clients’ investment portfolios are well-diversified. That way, negative shocks to one industry can be effectively cushioned, so that long-term returns are not significantly impacted. To understand if your current portfolio mix is adequately diversified and in line with your investing needs and time horizon, give us a call at 1-888-600-2783.

In the meantime, check out our latest Stock Market Outlook. Filled with facts and forecasts on different sectors and macroeconomic indicators, this briefing will help you get a leg-up over other investors when it comes to making educated investing decisions. To get your free copy, click on the link below:

 

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