Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

Can the Monster Banks Survive the Age of Trump?

The monster banks those gigantic hybrid financial institutions that Americans love to hate, are entering the age of Trump in a strong but precarious position. Investors need to take note because the political environment seems to be turning on these portfolio favorites.

Revenues are growing at three of the monsters are growing which indicates business is good. Yet the political times they are changing we have a new President; whose chief of staff Reince Priebus pressured the Republican Party to add a plank supporting reinstatement of the Glass Steagall Act of 1932 to its convention platform.

Glass Stegall was the law that barred commercial banks from engaging in investment banking. Its demise during the Clinton years set the stage for the rise of the big modern monster banks. So it is easy to see the potential parallel these institutions face particularly when politicians will be looking for scapegoats for the failure of questionable economic policies.

Revenue is growing at the Monster Banks

Despite their unpopularity the monsters are very profitable and widely viewed as value investments is that still the case? There are four monster banks operating right now, and three of them have recently reported some revenue growth. Here is how their revenues stack up:

  • Bank of America (NYSE: BAC) saw its revenues grow slightly during fourth quarter 2016. They rose by $220 million, going from $81.21 billion in September to $81.53 billion in December, which marks a slight turnaround.


  • JPMorgan Chase (NYSE: JPM) did slightly better, its revenues increased by $490 in fourth quarter. Revenues went from $95.18 billion in September to $95.67 billion in December.

  • Wells Fargo’s (NYSE: WFC) revenues stayed flat during fourth quarter. The revenue it reported in September ($88.27 billion) remained the same in December.


  • The odd man out was Citigroup (NYSE: C) saw its revenues drop by $1.44 billion during fourth quarter. It began the quarter with $71.31 billion in revenues and finished with $69.88 billion.

Limited Growth

These figures; provided by ycharts, prove that the monsters are capable of limited growth. Yet the situation at Citigroup proves that they are capable of sudden revenue reversals.

A major problem is that revenues at JPMorgan and Bank of America are well below their historic highs. JPMorgan reported revenues of $99.13 billion back in June 2013; Citi reported revenues of $77.40 billion as recently as September 2014, and BOA’s revenues hit a high of $97.59 billion in June 2012.

Those numbers indicate that these organizations’ revenue streams are unsustainable and erratic which can be a good argument for restoration of Glass-Steagall. That law was implanted in the Depression as an attempt to limit volatility in banking.

The Monster Banks still have a Lot of Cash

Supporters of the monster banks will claim that they still have a lot of float. Citigroup alone reported $1.792 trillion in assets and $160.49 billion in cash and short-term investments on December 30, 2016, but it also reported liabilities of $1.567 trillion.

Bank of America reported $2.188 trillion in assets and $157.60 in cash and short-term investments. Yet it also reported $1.921 trillion in liabilities for the fourth quarter.

JPMorgan Chase reported liabilities of $2.237 trillion for fourth quarter. That was contrast to $2.491 trillion in assets and $389.64 billion in cash and short-term investments reported on December 31, 2016.

Wells Fargo reported assets of $1.930 trillion and liabilities of $1.7131 trillion on December 31, but it only reported cash and short-term investments of $20.73 billion. That number alone should scare us because it indicates how fast the banks’ resources can disappear.

Are Monster Banks still a Good Investment?

My take is that the monsters are still a good investment but they are not for the faint of heart. The huge amount of liabilities and the recent problems at Deutsch Bank (NYSE: DB) show how potentially unstable these institutions can be.

Despite they can still pay off for investors, Wells Fargo paid a 38¢ dividend on February 1. Bank of America is scheduled to pay 7.5¢ in dividends on March 1, Citigroup paid a dividend of 16¢ on February 2, and Chase delivered a 48¢ dividend on January 4, 2017. This makes them good income investments that are still fairly reliable.

Yet the chaotic nature of the times is a major threat to these institutions’ future. One cash cow for banks that Trump seems to threaten is mortgages.

The number of FHA mortgage applications fell by 13% and applications and applications for FHA refinance fell by 25% after President Trump cancelled a proposed cut in mortgage insurance premiums, CNBC reported. The volume for all mortgage applications was down by 18% the Mortgage Bankers Association reported.

That indicates the monster bankers operate at the mercy of the government. Sales of consumer finance products; like mortgages, depend heavily on a favorable administration and the current president does not seem very generous to banks.

A good piece of advice is to hold the monster banks stocks; if you own them, but watch events in Washington carefully. The times they are a changing, and a slight shift in policy or Tweet can change the situation for these institutions dramatically. The monster banks will probably survive the age of Trump but they will not have smooth sailing.