What's going on?

Morgan Stanley was the last of the big American banks to report its second-quarter financial results when it said it made more money than investors expected on Wednesday. It was a reasonably good quarter for banks on the whole � but it wasn�t all rosy…

What does this mean?

�Better-than-expected� is nice, but the reality is that expectations for banks were pretty low. For example, revenue is still declining (Morgan Stanley�s was down 12% versus last year). In short, it�s a shrinking business. To counteract this, banks are decreasing costs � and that includes cutting jobs and lowering pay (which isn�t good for your banker friends). They�re also increasing automation (like bank tellers with apps and traders with algorithms). The good news (if you can call it that) for banks is that their stocks have performed poorly this year � and so it doesn�t take much to get investors excited. �

Why should I care?

For stocks: Bank stocks did well as their financial results were released.

Combine low expectations and (relatively) low stock prices with some decent news and the result is a rebound in stock prices. The second quarter turned out to be much better for banks than the first quarter of this year. The fact that costs from fines and litigation that resulted from banking�s heady days appear to be ending helps. The overall US stock market hitting a record high doesn�t hurt either.



The bigger picture: Banks should benefit if interest rates go up.


The improving US economy (among other things) has led to increased expectations that the US Federal Reserve will raise its target interest rate at least once before the end of this year. Rising interest rates would be good for banks because it would make it much easier for them to increase the interest that they charge their customers for loans (e.g. your mortgage rate) – thereby boosting their profit (no, they are not going to increase the interest they pay you as quickly).