Don’t Think All Bank Earnings Will Be The Same

Have you noticed that bank earnings reports so far have been pretty good? Wells Fargo (WFC) reported a good quarter and raised their dividend 10% yesterday, which sparked the market rally, despite the company’s large exposure to the California housing market. Today we got earnings above expectations from JP Morgan Chase (JPM) and PNC Financial (PNC). Does that mean that all the banks are out of the woods? Not really.

Unfortunately, the first banks to report were the better managed banks in the country (you can add U.S. Bancorp (USB) to the aforementioned three). Those four banks are very good at managing risk, hence their strong relative performance. The Wells Fargo report yesterday does not mean that other California-heavy mortgage lenders will be as fortunate. Wells simply had stronger underwriting criteria during the boom than other banks such as Washington Mutual (WM), National City (NCC), and Wachovia (WB), which can easily be seen in the underlying performance of their loan books.

Investors should continue to refrain from treating all banks the same. Companies like PNC, WFC, JPM, and USB are going to outperform the likes of WM, WB, and NCC for the second quarter and beyond simply because they have much better lending practices.

Full Disclosure: Long PNC and USB at the time of writing