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Something to Watch for in Big Bank Earnings

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Earnings for large cap banks will be trickle in soon and the point Marty Mosby, managing director at Guggenheim partners is most interested in is efficiency ratio data.

Efficiency ratios are expenses a bank has divided by its revenues. It reflects how much they have to spend to generate revenue in any given quarter. So far, banks are beginning to see improved or lower efficiencies ratios, but not improving or rising revenues, said Mosby.

Historically, efficiency ratios have been in the 55 percent to 60 percent level, said Mosby, but because of litigation costs, credit-related issues, and regulatory bank pressures, ratios peaked at 68 percent in second quarter 2012.

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Since then, banks have begun to see success in getting some of those expenses off the books, Mosby said, and at this point ratios are down to 66 percent.

According to Mosby, as efficiencies move lower, it will increase earnings power, overall earnings will improve and returns on capital will begin to improve.

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“Eventually you have to see the revenue equation start to improve, building some momentum as the economy begins to gain its traction, but while we’re waiting on that, we have this catalyst that improves earnings and returns that will push stock prices higher,” said Mosby.

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