A mixed day for financial stocks has investors hopeful but worried

The stock market continued its upside-down behavior on Monday, recovering from a tough week of broad-based gains. That Nasdaq Composite (^IXIC) enjoyed the biggest wins with the S&P500 (^GSPC 2.65%) and Dow Jones industry average (^DJI 1.86%) followed with still extremely strong advances.


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Data Source: Yahoo! finance.

Financial stocks continued to release their latest financial reports and major bank stocks on Monday Bank of America (BAC 6.06%) gave shareholders the news they were hoping for and sparked a sizeable gain for the stock. But elsewhere in the industry Karl Schwab (BLACK -2.25%) failed to post gains despite showing signs of recovery in a key element of its business’s money-making process. Read on to learn more about the two reports and whether financials in general should participate in the current rally.

B of A has a Grade A report

Bank of America shares rose more than 6% on Monday. The banking giant’s third-quarter results gave investors the confidence they were hoping for, with rising interest rates generally supporting the company’s results.

B of A saw strength in several key metrics. Revenue was 8% higher due to higher activity from the customer base. Net interest income increased $2.7 billion to $13.8 billion as higher interest rates boosted the amount B took from A on loans and other forms of credit. Average loans and leases were $1.03 trillion, up $113 billion over the trailing 12 months.

B of A’s consumer banking unit was particularly strong, offsetting weaker performance in the Global Wealth and Investment Management segment and Global Banking. Global markets had a mixed performance with weaker revenues but higher net profits than a year ago.

However, Bank of America failed to increase its profit overall. Net income of $7.1 billion declined from $7.7 billion in the third quarter of 2021 for earnings per share of $0.81. That was better than expected, however, and gave shareholders some comfort.

The bank also prepared for the tougher economic conditions ahead, increasing its claims reserves by US$378 million and paying US$520 million in write-offs. However, CEO Brian Moynihan pointed to improving capital ratios and consumer resilience as supportive factors for the company’s future.

Schwab shares fall despite record results

On the other hand, shares of Charles Schwab are down more than 2%. The move came despite what the discount brokerage giant called its strongest quarterly performance in the company’s history.

Schwab’s numbers were attractive at first glance. Revenue rose 20% to $5.5 billion, beating expectations, with adjusted net income rising 28% to $2.21 billion, equivalent to $1.10 per share. Even in one of the toughest stock market environments in history, Schwab has attracted $115 billion in core net new money, setting new records in retail fund inflows. The broker also stuck by its customers, growing the number of active brokerage accounts by 4% to 34 million.

The biggest factor in Schwab’s favor was a 44% increase in net interest income, with the margin expanding to 1.97% from 1.62%. This helped offset declines in wealth management and administration fees, many of which are charged based on a percentage of client assets.

Looking ahead, it is evident that investors expect financial markets to be a long way from their current doldrums. History supports this view, but inflationary pressures have proved stubbornly difficult for the Federal Reserve to deal with successfully. Whether or not rising short-term rates translate into longer-term rates, the danger for both Bank of America and Schwab is that an economic downturn could be longer and more severe than expected.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Charles Schwab is an advertising partner with The Ascent, a Motley Fool company. Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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