The commercial banking industry is doing okay. This week, the biggest banks will be beginning to report their 2019 results.

The expectation is that the profit picture at the biggest banks will be good, but not overwhelming. The rest of the industry? They will do alright, but for the future, the rest of the banking industry will not be all that interesting.

Remember that the largest 25 banks in the country hold a little over 60 percent of the commercial banking assets and that the top five hold the vast majority of the 60 percent.

Anyhow, the largest banks are in pretty good shape at this time.

The return on tangible equity of the “big six” financial institutions covers the banks’ marginal cost of capital, roughly estimated to be around 10.0 percent.

And, how good has the performance been?

Well, heading the list, as expected, would be JPMorgan Chase (NYSE:JPM) with an average return on tangible equity for the past year of 16.1 percent.

Next would come Wells Fargo & Co. (NYSE:WFC) with an average return of 13.6 percent.

Following is Citigroup Inc. (NYSE:C) with an average return of 13.3 percent. Then comes Morgan Stanley (NYSE:MS) returning 10.8 percent and Goldman Sachs (NYSE:GS) at 10.0 percent.

With the exception of JPMorgan, the average return on tangible equity at these banks fell during the last four quarters.

This should not be an unexpected outcome since interest rates declined through most of 2019. The decline in interest rates was led by the Federal Reserve system, which cut its policy rate of interest three times during the year.

And, short-term interest rates were falling worldwide as central banks in Europe and elsewhere cut their policy rates of interest to combat the slowdown in economic growth being experienced in these areas. The Federal Reserve believed that it needed to cut rates as well, but in response to what the other central banks were doing so that the value of the US dollar would not get too strong.

But, there have been other things going on as well within the banking industry.

For one, loan growth throughout 2019 has been modest at best. There has been uncertainty as to what the Federal Reserve is going to do about capital rules. And, the capital markets have been very volatile.

For example, Telis Demos writes in the Wall Street Journal, “Lower rates did exact a toll in the third quarter, sharply compressing the core margin earned paying depositors and collecting interest.”

Net interest income fell quarter over quarter throughout 2019. Before that net interest income had risen for 15 quarters in a row.

Net interest margins fell in the third quarter at all the big banks. The impact has still been felt in the fourth quarter.

In terms of fee income, the fourth quarter at the banks may be a little better than what was achieved in the third quarter, but substantially above what was earned in the fourth quarter of 2018.

The fourth quarter in 2018 saw market trading that was dismal, but with markets producing rising prices this year, expectations are for a pickup here.

Overall, loan growth has been rather modest during the year, but JPMorgan and Citigroup have reported that they have gotten some help here in the credit card area and in consumer loans. In fact, according to Mr. Demos, consumer loans to large banks grew by 11.9 percent year over year in the fourth quarter.

Mortgage loan growth has also done relatively well as many consumers refinanced these loans as a result of lower mortgage rates.

So, it looks as if the earnings of the largest banks will hold up for the fourth quarter and the returns to tangible equity will still remain fairly high relative to the banks’ marginal cost of capital.

Fourth quarter of 2019 and the year of 2019?

These large banks will be doing okay if not outstanding.

Ben Eisen and David Benoit report that stock buybacks in 2019 have been strong with Bank of America, Wells Fargo and JPMorgan being among the top four buyers of their own shares in the third quarter of the year.

Mr. Eisen and Mr. Benoit also report,

All told, S&P 500 financial firms bought back almost $48 billion of shares in the third quarter, the most in records going back to 1998.”

This behavior, to me, represents the belief on the part of commercial banks that earnings will continue to show increases, although they might be modest increases, in the fourth quarter of 2019 and also in 2020.

Big bank earnings coming out this week should give no reasons for any kind of a sell-off in financial stocks. The basic conclusion about fourth-quarter earnings is that things can continue on about where they now are.

For the longer run: The strongest big banks are going to be a winner and the banking industry continues to shrink due to technological advances that will primarily benefit those that can take advantage of and manage scale factors that will be even more dominant in the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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