The markets are picking up steam, recovering from the 7.5% peak-to-trough fall. Cyclical sectors have taken the lead from the June 24th low. While Materials and Utilities are offering opportunity for value buyers with their under-performance against the broader market, it has been Financials and Consumer Discretionary which have been leading from the front.
Last week’s improved employment figures and rise in consumer sentiment is good news for consumer confidence and spending. Rising interest rates from an expanding economy allows banks more leeway on the borrow-lending spread, which is ultimately responsible for generating their profits.
The Financial Select Sector SPDR (ETF) (NYSEMKT:XLF) has returned nearly 7% (at time of writing) since its swing low, and is one of the first sectors to make new highs for 2013. This particular fund has enjoyed strong cash inflows over the past week attracting $805 million in investment.
Banks have benefited from a steady decline in nonperforming loans, which offers earnings stability. Plus, there has been a corresponding rise in Banks’ Total Assets value. The worst effects of the financial crisis appear to be behind them.
US Nonperforming Total Loans for all Banks data by YCharts
Digging down to individual names, revenues from the two lead components of the ETF, JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) have also started to recover following their respective acquisitions of Bear Stearns and Wachovia during the credit crisis. Periods of flat revenues in the past have been followed by sharp advances as recession gives way to expansion. A slowly improving job markets, improving yields and signs of a more aggressive Fed signify a macro turn in the economy.
JPM Revenue TTM data by YCharts
In January, I suggested three financial stocks for the first half of 2013: Ameriprise Financial, Inc. (NYSE:AMP), American Express Company (NYSE:AXP), and Invesco Ltd. (NYSE:IVZ). All three have outperformed the S&P for this period, but best of the three is Ameriprise Financial, Inc. (NYSE:AMP) which is up 30% from its feature price over the course of the half year.
Ameriprise Financial, Inc. (NYSE:AMP)
This has been assisted with an aggressive stock buyback, which has enabled existing shareholders take home a greater share of the dividend pie. The net effect has been to keep yields around the 2.5% mark, but it has also fueled capital growth on dividend reinvestment. The company remains focused on returning capital to shareholders in a “prudent manner”. The plan for this year is to return 100% of earnings to shareholders, plus the $375 million freed up from exiting the bank.
The company’s most recent quarter came in just ahead of earnings-per-share expectations, with a respectable beat on revenues. Its Wealth Management business remained the core business driver and generated “very strong results”. Europe remained a drag, although the improvement in global equity markets helped offset weakness in low yielding bonds. Operating revenues increased 7% to $1 billion on record retail client net inflows and market appreciation. Advisor client assets grew 11% to $372 billion with net inflows of $4.1 billion, a 41% gain year-on-year. Advisor productivity was also up 9% as measured by net revenue per advisor. Quarterly growth was delivered from its retail division, less from its assets under management which was up 2% sequentially to $466 million. If there was a caveat to the retail division results it was that cash positions were “abnormally high”, particularly at end of year (Q4 heading into Q1). This means less trading and therefore less revenue, but it’s also money available to go to work.
The company is still bedding in its new brokerage platform: it’s looking at a 18-24 month period to get its advisors up to speed. I don’t expect cost efficiencies to show until then. Comments made on the call were defensive with regards to its costs, but as with many significant technology upgrades it will take time to deliver results.
The company is looking at possible acquisition opportunities, but has yet to identify a suitable candidate.
