May 5, 2014

Doug Kass short JP Morgan Chase

Consider the hedge-fund community's favorite bank, Bank of America [BAC], which I'm short. Its net interest margin, fell to an adjusted 2.29% in the first quarter, and net interest income around $10 billion was disappointing.

FICC activity, which involves trading of fixed income, currencies, and commodities, has been weaker lately for many of them [Banks], including JPMorgan Chase. 

As for credit quality, interest rates, and the yield curve, if all these go in the wrong direction, capital-market activity could be weak. If I'm correct about a market correction, that will put pressure on these banks. Loan demand is tepid and growing slowly, partly because of subpar economic growth and partly because the country's largest companies are very liquid and don't need a lot of credit. Credit quality has improved in the past three or four years, but it's more of a headwind now, as loan-loss provisions start to be less of a benefit. 

That leads us to interest rates and the slope of the yield curve, by far the most important factor for bank profits; it should be the most worrisome area for bank investors and bank profits. 

Article originally published on April 26, 2014 on