Banks’ Earnings Disappoint, But NPAs Fall Even Faster Than Expected

The banking sector has had a mildly disappointing quarter, with weak earnings quality offset by improving credit quality. While the drop in non-performing assets (NPA) is good news, it can’t be continued indefinitely and net interest margins continue to come under pressure. Add in price growth that has outpaced the stock market for the last two years and the sector could be headed for a downward correction.

The rapidly increasing earnings void

“As the banks scramble to fill the rapidly increasing earnings void, our sense is the group will trade sideways until a clearer picture of the economy appears and political/regulatory pressure subsides,” write Sterne Agee analysts Todd Hagerman and Robert Greene, pointing out...