Strong balance sheets, boosting profits and the reserve releases now taken characterized todays bank earnings': Analyst

Aberdeen Standard Investments Senior Bank Analyst and Senior Investment Manager Jon Curran joined Yahoo Finance Live to share his thoughts on bank earnings.

Video transcript

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ADAM SHAPIRO: 27 minutes to the closing bell. Let's take a look at what's happening with markets as we get ready to end the trading session. The S&P 500 is off by about 10 points. The Dow, however, the Dow is trading higher up almost 100 points. You got the NASDAQ off about 100, 107 points. We're going to hit all of this at 4:00 PM when that closing bell rings.

But now we want to get the results of the banks, but from someone who watches this very closely. Jon Curran is joining us in the stream. He is Aberdeen Standard Investments senior bank analyst and a senior investment manager. And what's the headline you think to what we saw from JP Morgan? Would it be a story of fewer loan loss reserves necessary or trading desks rule the day?

JON CURRAN: Well, that's a good point. I think, you know, wow, what a difference a year makes. Last year at this time, the banks were preemptively provisioning to build up their reserves. And this year, they've shown they've come across and coming down the mountain right now and are able to take those reserve releases because they've more than adequately provisioned for what they expect losses to be. On top of that, I think your point is well taken that there's just a ton of fee revenue right now, driven by very strong markets and investment banking results.

SEANA SMITH: Jon, what about the reaction, though, in the stock today? We have JP Morgan off just around 2%, Goldman Sachs up about 3%. Wells Fargo is also moving to the upside. Why do you think we're seeing pressure in JP Morgan?

JON CURRAN: That's a great question from my equity counterpart. I'm actually a bond guy, so I can tell you what I look for. And the three things that I think characterize the earnings today were the strong balance sheets, the Reserve releases that are now being taken and boosting profits to JP Morgan's $14.3 billion in profits, a record number for them, and also, the fee income, which is really strong.

Now the balance sheet is what we focus on as bond holders and the three aspects, the three legs of the stool, as I like to call it, are in terrific shape. Durable deposit liquidity, deposit growth of 36% year on year, capital at 13.1%, which is fabulous-- they've maintained that linked quarter and really show they have a fortress balance sheet-- and asset quality. And in fact, their current allowance for loan losses covers current charge-offs by 6 times. So taking that $5.2 billion Reserve release was actually not at all detrimental. They have more than enough to cover what they expect to be charge-offs in the future.

ADAM SHAPIRO: But to follow up what Seana was saying and since you are an expert with bonds, shouldn't the stocks-- wouldn't you think they'd be going higher? Because with the expected increase, whether it be small or rapid, of interest rates, the margins are going to spread for the banks. They're going to do better.

JON CURRAN: Sure. Well, so it's going to take a little bit of time for this to percolate through. I mean, obviously, we want to see loan growth take place a little bit greater. I mean, one of the things Jamie Dimon cited today is that the economy is stabilizing, consumer spending is up, but loan balances are down. So the two headwinds that JP Morgan actually faces right now is card balances, which were a little bit lower despite increased spending, so perhaps more transactors than revolvers on their credit card portfolio.

And then the other thing is expenses. They had guided to $69 billion last quarter. Now it's more like $70 billion. So there are some slight headwinds. But I would say the characterization of the quarter would be mostly sunny. There are a few clouds, but they're very, very minor. And I think JP Morgan is persevering and showing its tenacious ways.

SEANA SMITH: Jon, what about the sustainability of this? When you see numbers like, just take Goldman, for example, blockbuster quarter. Their revenue was more than double what we saw a year ago. Is this a trend that you think can continue?

JON CURRAN: Well, that's a fair point. I mean, in the top line with Goldman, you saw a lot of-- obviously, Goldman derives close to 80% of their business from markets-based revenues. And those are firing on all cylinders right now. I think they steal the headlight-- steal the highlights, actually, for Goldman.

If you peek under the hood, Goldman actually had some really good results in their Consumer and Wealth Management business, their burgeoning consumer bank, and their Asset Management business, too. So, I think it remains to be seen whether or not they can sustain them. And clearly, this is hard to have a run rate at this level. But right now, the markets are operating at full tilt. And Goldman is a big beneficiary of that.

ADAM SHAPIRO: When we talk about other banks-- let's talk about Wells Fargo.

JON CURRAN: Sure.

ADAM SHAPIRO: I mean, there's a bitter taste in the mouths of a lot of not only customers, but investors with Wells Fargo. Have they turned the ship around there?

JON CURRAN: So Wells Fargo's story is one of turnaround and rehabilitation. And obviously, they're in a massive cost cutting program. They put a lot of businesses on the block. Seeing how these cost savings measures are going to translate into growth, I think, is the big story for them. They are still having a very strong balance sheet, which we, as bond holders, like. But the key question for them will be how are they going to grow themselves out of this transformation? And they also want to really grow an investment banking presence, too. So that'll be interesting to watch in the days and months ahead.

SEANA SMITH: Speaking of transformation, we know Morgan Stanley, for example, has made a pretty strategic acquisition here not too long ago. We also have-- we have Morgan Stanley, and then we also have Bank of America who has still has yet to report results. What can we expect to see from some of those big names?

JON CURRAN: Yeah, so I think that the readthrough for Bank of America and Citigroup tomorrow, similar to JP Morgan, Bank of America is a very close comparable bank to JP Morgan, diversified at scale and with a maybe not quite as fortress-like a balance sheet, but a very strong balance sheet nonetheless. So they should have a very good quarter for bondholders and I imagine very strong fee income from investment banking and markets.

Citigroup, I'll be looking for the card balances aspect because they have a huge credit card portfolio. And so, despite spending being up, balances were down, as I mentioned earlier. But they should have a strong quarter, too, because, again, Citigroup is diversified, global in scale.

And then Morgan Stanley should-- the readthrough from Goldman should be pretty similar to Morgan Stanley for strong markets results. And of course, Morgan Stanley has done a fabulous job derisking its business and balance sheets, so going for more of the fee-based revenues from Asset Management. And of course, they've recently transacted in that space with E-Trad and Eaton Vance to further bolster that area.

ADAM SHAPIRO: Jon Curran is Aberdeen Standard Investments senior bank analyst and senior investment manager. Thank you for joining--