Why Did Bank Investors Get It So Wrong?
2. Bank investors failed to recognize that banking is increasingly a competitive business that is being commoditized. The threat of non-bank financials and inflation is keen -- both of which have served to raise technology costs and general expenses at a time when many of the business lines' profitability is contracting under the constant pressure of competition.
3. Bank investors failed to understand how a rise in interest rates would adversely impact the marks to market on "securities held for sale" and, in turn, capital ratios -- which will likely limit company buybacks . (See quote at the beginning of this column on JPMorgan's reduced Tier 1 capital ratio in the quarter.)
4. Bank investors failed to remember that the world has grown more flat economically and that, like in a game of dominos, lending around the world can be treacherous and victims of outlier events (read: Russia).
5. Bank investors failed to understand how quickly investment banking revenues/profits can evaporate.
6. Bank investors failed to calculate the impact of a quick cyclical turn in investment management fees (lower bond and stock prices) and in reduced capital market activity.
7. Bank investors failed to recognize that the credit cycle can turn quickly.
8. Bank investors failed to identify that some bank managements (like Citigroup) can become victims of empire building and expanding geographical presence, at the expense of profitability and capital positions.
From Tuesday: Bank Stocks Are Still 'A Full-On Monet'
From January: Why JPMorgan's EPS Release Is Bad for All Equities
But I had soured on the outlook for bank stocks even before the JPMorgan earnings release in January: