After a period of rough trading in the early part of the year, the financial sector is turning around on improving fundamentals and positive sentiment across banks. In fact, a strong momentum has built up for the space in recent months, propelling the stocks to new yearly highs. This suggests that finance is clearly emerging out of the worst recession seen in 2008.
This is especially true as the sector's earnings growth has been on an upward trajectory since the start of this year, as per the Zacks Earnings Trend. Earnings rose 3.8% annually in the third quarter from 0.9% in the second and a dilution of 7.1% in the first. This trend of sustained earnings growth will likely continue as we move into the next year. Earnings are expected to increase 6.9% in the ongoing fourth quarter and 11.5% in the first quarter of 2015.
Notably, the banking industry has seen another robust quarter. American banks and other financial institutions insured by the FDIC recorded their largest quarterly revenue growth in the third quarter in almost five years. Revenues rose 4.8% from the year-ago quarter, making this a $171.3 billion industry. On the other hand, profits climbed 7.3% year over year to $38.7 billion following the second-highest profit of $40.24 billion recorded in the second quarter in at least 23 years (read: Q3 Bank Earnings Put These Financial ETFs in Focus).
Further, the number of banks at risk of failure continued to decline and only two banks failed in the last quarter, down from six a year ago. Strong performances were mainly driven by solid loan growth, higher trading income, improving credit quality and litigation settlements. In addition, the quality of earnings is improving with growing economic conditions. And, as the health of banks' loan portfolio continues to improve, they will need less loan loss reserves in the future.
In fact, the four big banks – JPMorgan (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC) and Wells Fargo (NYSE: ...
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