Zacks Industry Outlook Highlights: JPMorgan Chase and Wells Fargo
CHICAGO, Dec. 19, 2012
CHICAGO, Dec. 19, 2012 /PRNewswire/ --Today, Zacks Equity Research discusses
the U.S. Banks, including JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo &
A synopsis of today's Industry Outlook is presented below. The full article
can be read at
What's in Store for U.S. Banks in 2013?
U.S. banks look ready for 2013 with uninterrupted expense control, sound
balance sheets, an uptick in mortgage activity and lesser credit loss
provisions. Moreover, a favorable equity and asset market backdrop,
progressive housing sector and an accommodative monetary policy are expected
to make the road to growth smoother.
Yet, a favor from top-line growth still remains uncertain due to expected
sluggishness in loan growth, pressure on net interest margin from the
sustained low rate environment and less flexible business model owing to
stringent risk-weighted capital requirements (Basel III standard).
U.S. banks are actively responding to legal and regulatory pressures,
indicating competence to encounter impending challenges. But the potency of
the sector is not expected to return to its pre-recession peak anytime soon.
Economic intricacies, both domestic and overseas, may even result in some more
disappointments in the upcoming quarters.
Overall, structural changes in the sector will continue to impair business
expansion and investor confidence. Several dampening factors – asset-quality
troubles, mortgage liabilities and tighter regulations – will decide the fate
of the U.S. banks in the year ahead. But entering the new capital regime will
ensure long-term stability and security for the industry.
Clear Signs of Improvement
Progress seen in the first three quarters of this year gives a clear growth
indication. Besides contraction in provisions for credit losses and cost
containment, marked recovery in the bond and equity markets and consequent
revenue growth helped most of the banks report higher-than-expected earnings.
Expanding consumer credit and overall improvement in lending activity made it
easy for banks to show continued improvement.
The third quarter in particular showed exceptional top-line growth. Revenue
growth was the best since 2009 buoyed by solid growth in mortgage revenue.
Most importantly, for the first time in almost three years, banks did not have
to majorly depend on accounting tricks for increasing earnings, thanks to
strong top-line growth.
Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and
savings institutions reported third-quarter earnings of $37.6 billion,
outpacing year-ago earnings of $35.2 billion by nearly 6.6%. This marked the
13th straight quarter of year-over-year earnings increase.
More than half (57.5%) of all institutions witnessed year-over-year
improvements in net income during the quarter primarily on improved top lines
and reduced loan loss provisions. Major banks earned nearly 82.0% of the total
third-quarter profit. These include mammoth players like JPMorgan Chase & Co.
(NYSE:JPM) and Wells Fargo & Company (NYSE:WFC), which commands a significant
portion of the U.S. banking market.
The Zacks Consensus Estimate for JPMorgan is earnings of $1.22 per share for
fourth quarter and $5.01 for full year 2012. Wells Fargo is expected to earn
89 cents per share in the fourth quarter and $3.35 in the full year. For 2013,
earnings of JPMorgan and Wells Fargo are expected to increase 5.8% and 7.9% to
$5.30 and $3.61 per share, respectively, indicating significant improvement in
the key banking sector in 2013.
Fewer Bank Failures and Problem Institutions
During the third quarter, only 12 FDIC-insured banks failed -- the least in a
quarter since fourth quarter 2008. As of December 14, 2012, the tally of
failed banks came in at 51 compared with 90 in the year-ago period.
Moreover, as of September 30, 2012, the number of FDIC's "problem
institutions" declined from 732 to 694, which is the lowest since third
Achieving Profitability Won't Be Easy
We don't expect reduction in provisions for credit losses to significantly
help earnings growth in the upcoming quarters as the difference between loss
provisions and charge-offs is gradually decreasing.
Banks will definitely try to look at other areas -- interest income,
non-interest income and operating costs -- to maintain earnings growth, but
there will be limited opportunity given the expected weakness in lending
activity due to regulatory restrictions, sluggish economic recovery and the
so-called fiscal cliff.
Efforts to cut interest expenses and take additional risks to improve net
interest margins could be marred by a flattening yield curve. Further,
shifting assets to longer maturities for net interest margin strength could
backfire once interest rates start rising.
Conversely, increasing revenues through non-interest sources – prepaid cards,
new fees, higher minimum balance requirement on deposit accounts and
encouraging credit cards – could be hampered by regulatory actions, economic
volatility and soaring overhead. So, non-interest income can only marginally
contribute to total revenue.
Eventually, banks will have to resort to cost containment through job cuts and
reduced size of operations to stay afloat. So, any cost-cutting measure will
act as a defense. The last four years saw about half a million banking
layoffs, and the story continues.
What QE3 and "Fiscal Cliff" Mean for Banks?
While the quantitative easing or QE3 effort of the central bank is expected to
stimulate loan demand, wholesale recovery in lending activity is unlikely with
memories of recession and job loss keeping customers away. But, QE3 will
definitely help banks with respect to generating loans to some extent.
Then again, if the U.S. steps off the fiscal cliff, which enforces tax hikes
and spending cuts, interest rates will remain low and net interest margin will
fail to improve. Also, likely changes in the capital gains tax due to fiscal
cliff will sidetrack many businesses from loans.
Balance Sheet Recovery to Take Time
Steady deposit growth from lack of low-risk investment opportunities post
financial turmoil is quite possible, but high charge-offs and delinquency
rates plus weak demand could keep loan growth under pressure next year.
Banks are trying to address asset-quality troubles by divesting nonperforming
assets, but we don't expect balance sheets strength to return anytime soon.
BaselIII: A Major Concern
The implementation of Basel III requirements from 2013 will boost minimum
capital standards. But adjusting liquidity management processes will cause a
short-term negative impact on the financials of U.S. banks.
This will ultimately make credit costlier and reduce employment. But a greater
capital cushion will help larger banks withstand internal and external shocks
over the long run.
Macro Backdrop Still Uncertain?
Though improved economic data such as higher consumer spending and gross
domestic product (GDP), improving housing market and declining unemployment
rate point towards optimism, a paltry interest-rate environment is disturbing.
Also, uncertainty over fiscal cliff could keep economic growth tardy.
The European debt crisis will exacerbate the situation. Though the U.S.
commercial banks appear to have significant direct and indirect exposure to
Europe, potential costs are expected to be manageable. But if the crisis
deepens, worldwide capital markets will face a big blow, and the U.S. will not
be left unscathed.
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