Profit Jump More Good News for Bank Stocks

Bank stocks have been on the rise this year.

Shares of the six largest U.S. banks have gained an average of 17.5% in 2012. Wells Fargo (NYSE: WFC) is actually back near its pre-recession levels.

But aside from Wells Fargo, which has steadily grown profits over the last four quarters, most bank stocks have rallied simply by beating low expectations. The big banks have regularly beat earnings estimates the last few months despite not turning a profit, in some cases.

For many banks, the bar has been set so low since the recession that there’s not much of a hurdle for them to clear.

But that could be changing.

A report out today shows that U.S. bank profits rose 21% from April to June, making it the third-best quarter since the financial crisis hit.

The Federal Deposit Insurance Corp. said that the nation’s 7,246 banks earned $34.5 billion in the second quarter – better than the $28.6 billion they earned a year ago.

So that’s progress. That’s not simply clearing a low hurdle – that’s legitimate, definitive year-over-year growth.

The news hasn’t done much for bank stocks this morning, as most of them have been largely stagnant today. However, it’s a sign that U.S. banks may finally be turning a financial corner four years after the subprime mortgage crisis.

Lending activity grew for the fourth time in five quarters. And the banks are cutting down on the money they spend on bad loans. Loan-loss provisions fell to their lowest level in five years at $14.2 billion.

However, plenty of rough seas lie ahead for the banking industry.

As I wrote yesterday, several U.S. banks have been accused of interest-rate manipulation – a development that could, if proven true, result in billions of dollars in lawsuits.

Also, according to the Wall Street Journal, 732 U.S. banks remain on the FDIC’s “problem” list – though that’s the lowest number to make the list since late 2009.

And financial institutions with heavy investment banking operations are struggling amid uncertainty in the market. Just ask JPMorgan Chase (NYSE: JPM) how much damage the whole “London Whale” incident inflicted on its bottom line.

Still, today’s report is a clear sign of progress. Now all the banking industry needs is a few more quarters just like it.