By Kevin Grewal, Editorial Director at www.SmartStops.net
NEW YORK (
) -- Despite the
Securities and Exchange Commission's
allegations of fraud at
, taxpayer infusions that propped up U.S banks in 2008 and 2009 may have paved the path to prosperity for some of the nation's largest financial institutions.
In the first quarter of the year, the nation's largest bank by assets,
Bank of America
, boasted a $3.2 billion profit and returned to profitability for the first time in three quarters. A big part of this profitability was driven through strong investment banking numbers and operations inherited in its acquisition of securities firm Merrill Lynch. In fact, the operations inherited from Merrill accounted for more than half of Bank of America's profit and 30% of its revenue, primarily from its fixed-income trading.
To further bolster Bank of America's appeal, five of its six business units were profitable during the first quarter and consumer credit delinquencies seem to be on the mend. Among credit-card users, the number of loans at least 30 days late declined, enabling the financial institution's credit-card unit, once the institution's largest loser, to earn $952 million during the quarter.
As for the future, Bank of America is focusing on growth in Asia and Europe as well as utilizing relationships between Merrill Lynch's talented array of financial advisers and Bank of America's corporate bankers to boost revenue. Additionally, the bank is contemplating revamping its consumer pricing model, with the possibility of including a maintenance fee for certain accounts to soften the revenue blow that is expected to result from eliminating overdraft fees and other traditional charges.
Bank of America is up 22.3% year-to-date and closed at $18.41 on Friday.
Another financial institution that generated healthy profitability in the first quarter was
. The financial institution reported net income of $3.3 billion for the quarter with strong performances from its investment banking and fixed-income trading arms.
Solid results were also seen in asset management, commercial banking and retail banking. Much similar to Bank of America, JPMorgan witnessed improvements in consumer credit delinquencies and resulted in a reserve reduction of $1 billion.
JP Morgan Chase is up 9.6% year-to-date and closed at $45.55 on Friday.
Wells Fargo & Company
should release similar results on Wednesday with expected earnings of 42 cents per share on healthy profitability from the majority of its business units. The San Francisco, Calif., based financial institution is likely to gain further appeal due to its expansion of innovative services.
Recently, the financial institution announced that it has released its next generation program administration, reporting and reconciliation tool, the proprietary, online Commercial Card Expense Reporting service. This CCER program helps customers by replacing a multi-card strategy comprised of separate travel and entertainment cards, fleet cards, procurement cards and, in many cases, traditional paper-driven processes, such as administration of petty cash or purchase orders and invoices. This program is aimed to increase efficiency for the consumer and drive the most benefit to customers.
Wells Fargo is up 20.8% year-to-date and closed at $32.56 on Friday.
Improvements in consumer credit, investor confidence, consumer confidence and an expected uptick in the mergers and acquisitions arena should fare well for these institutions in the near term. Some things that could hinder their performance include financial regulatory reforms and restrictions, the continuing problems that are being battled in the mortgage division and overall uncertainty in the industry as a whole.
Some ways to play all three of these financial institutions include:
Financial Select Sector SPDR
, which allocates nearly 29.75% of its assets to Bank of America, JPMorgan Chase and Wells Fargo. XLF is up 13.9% year-to-date and closed at $16.36 on Friday.
iShares Dow Jones US Financial Services
, which allocates nearly 36.3% of its assets to the three financial services' institutions. IYG is up 14.5% year-to-date and closed at $61.43 on Friday.
Vanguard Financials ETF
, which allocates 23.6% of its assets to the three companies. VFH is up 15% year-to-date and closed at $33.36 on Friday.
Although an opportunity seems to exist in financials, it is equally important to keep in mind the forces that could hinder the sector. To protect against these forces, the use of an exit strategy that identifies a price point at which an upward trend in these equities could come to an end is important.
According to the latest data at
, an upward trend could come to an end at the following price points: BAC at $17.64; JPM at $44.81; WFC at $31.21; XLF at $15.96; IYG at $59.61; VFH at $32.66. These important price points change on a daily basis and are reflective of market conditions. Updated data can be found at www.SmartStops.net
Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.