When it comes to earnings season, the nation’s largest banks act as master of ceremonies.
That’s because they’re among the first to report and set the tone as earnings season unfolds.
For this quarter’s initial round of reports last week, the tone was one of disaster.
Earnings declined 45% or more at the nation’s four largest banks.
And things don’t look to improve for quite some time. Collectively, those four firms set aside $33 billion to cover future loan losses as the pandemic threatens yet another round of shutdowns.
But take a closer look at the details, and you’ll find not everything was negative.
You see, these goliath banks are comprised of different segments that focus on different types of business activities. While all the attention was on losses in lending divisions, another segment put up billions of dollars in profits … and there’s a simple way for you to grab a share.
Where Demand Has Soared During the Crisis
While the pandemic has driven a calamity on Main Street, it’s driving a profit bonanza on Wall Street.
That’s thanks in part to increased demand in capital markets, as Bank of America Chief Executive Officer Brian Moynihan pointed out last week.
“Strong capital markets results provided an important counterbalance to the COVID-19 related impacts…” he said in comments that were echoed across the other major banks.
So much so that some banks have seen record profits in their capital markets segments.
These capital market divisions provide a number of services, including trading in stocks and bonds as well as raising funds for cash-strapped corporations.
And all those services have been in high demand.
Corporations impacted by the pandemic have scrambled to raise money by issuing debt and/or equity. The initial public offering market is once again heating up, and trading activity has soared.
Firms engaged in capital markets make money on all those activities.
Just look at these highlights from last week’s earnings reports:
- Citigroup Inc. (NYSE: C) delivered a 68% jump in fixed-income trading revenue.
- JPMorgan Chase & Co. (NYSE: JPM) reported a 54% increase in investment banking fees.
- Morgan Stanley (NYSE: MS) saw bond trading revenues leap by 170%.
- Bank of America Corp. (NYSE: BAC) had record investment banking results of $2.2 billion.
And many of these firms also earn fees by managing stock and bond portfolios, which have quickly recovered from the first quarter’s losses following over $6 trillion in stimulus.
Now, you probably wish you could invest only in the capital markets segments of these big banks, and avoid lending divisions.
The good news is that you can. There’s an exchange-traded fund (ETF) that targets companies that only operate in the capital markets. It’s called the SPDR S&P Capital Markets ETF (NYSE: KCE).
If you caught this week’s installment of Your Money Matters, you heard me mention this great opportunity along with several others.
The most uncertain earnings seasons in recent memory is just getting started.
But one thing is already for sure, and that’s the profit windfall taking place among capital markets firms. KCE is your chance to get in on that action.
Best regards,
Research Analyst, The Bauman Letter