A mixed day for financial stocks worries investors

The stock market continued its upside behavior on Monday, rebounding from a tough week with broad-based gains. The Nasdaq Compound (^IXIC 3.43%) recorded the largest gains, with the S&P500 (^GSPC 2.65%) and Dow Jones Industrial Average (^ DJI 1.86%) following suit with still extremely strong advances.

Index

Percent Daily Change

Daily point change

Dow

+1.86%

+551

S&P500

+2.65%

+95

Nasdaq

+3.43%

+354

Data source: Yahoo! Finance.

Financial stocks continued to release their latest financial reports on Monday, and shares of major banks Bank of America (BAC 6.06%) gave shareholders the news they had been hoping to see, sparking a huge push for the stock. However, elsewhere in the sector, Charles Schwab (SCW -2.25%) was unable to post share price gains even with signs of recovery in a key part of its lucrative business. Read on to learn more about the two reports and whether financial stocks 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 had been hoping for, with rising interest rates having a generally positive effect on the company’s numbers.

B of A saw strength in several key measures. Turnover increased by 8%, thanks to greater customer activity. Net interest income climbed $2.7 billion to $13.8 billion as higher rates pushed up the amount B of A collected on loans and other forms of credit . Average loans and leases were $1.03 trillion, up $113 billion over the past 12 months.

B of A’s retail banking unit was particularly strong, offsetting weaker performance in the global wealth and investment management segment as well as global banking services. Global markets posted mixed performance, with lower revenue but higher net profit than a year ago.

However, Bank of America failed to increase its bottom line overall. Net income of $7.1 billion was down from $7.7 billion in the third quarter of 2021, which translates to earnings of $0.81 per share. It was better than expected, however, giving shareholders some comfort.

The bank also braced for tougher economic conditions ahead, increasing its loss reserves by $378 million and paying charges of $520 million. Still, CEO Brian Moynihan pointed to improving capital ratios and consumer resilience as supporting factors for the company’s future.

Schwab shares fall despite record results

On the downside, shares of Charles Schwab fell more than 2%. The move came despite what the discount brokerage giant called the best quarterly performance in company history.

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

The main factor in Schwab’s favor came from its 44% rise in net interest income, with its margin rising from 1.62% to 1.97%. This helped offset lower asset management and administration fees, many of which are charged based on a percentage of clients’ asset balances.

Looking ahead, it is clear that investors expect financial markets not to stay in their current slump for long. History confirms this view, but inflationary pressures have proven stubbornly difficult for the Federal Reserve to manage. Whether or not rising short-term rates continue to trickle down to longer-term rates as well, the danger for 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 of The Ascent, a Motley Fool company. Dan Caplinger has no position in the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

Robert D. Coleman