Biggest Banks Beating Estimates Can’t Hide 13% Drop in Revenue
The biggest percentage drop in quarterly revenue in three years, driven by lower lending and reduced fees, is damping investor appetite for shares of the six largest U.S. banks.
Net revenue at the six lenders -- Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley -- fell 13.3 percent in the first quarter from a year earlier, according to data compiled by Bloomberg. Pretax pre-provision profits, which exclude taxes, loan-loss provisions and one-time items and are considered a better gauge of profitability than earnings, slid 40.2 percent.
While five of the banks beat analysts’ estimates, and JPMorgan and Wells Fargo reported record quarterly earnings, anemic revenue and a steady drop in pre-provision profits have kept investors at bay. Since JPMorgan reported earnings on April 13 with a 67 percent rise in net income to $5.6 billion, the KBW Bank Index (BKX) of the 24 largest U.S. banks has fallen 3.5 percent as the Standard & Poor’s 500 Index climbed 1.6 percent.
“You’re seeing people backing off of exposure to this space because of the lack of loan growth and poor revenue growth,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst for FBR Capital Markets in Arlington, Virginia. “It’s not a sell-off -- it’s more of a slow drift down. These stocks are going to trade very weak” until their loan books and revenue start to grow.
With unemployment stuck above 8 percent, housing prices falling again and restrictions on how much they can charge for services, U.S. lenders are underperforming the broader market. That’s true even as more than 80 percent of the first 28 institutions to report quarterly earnings met or beat analysts’ estimates, Melissa Roberts and Elissa Niemiera, analysts at KBW Inc., wrote in an April 20 research note titled “Taking Some Heat Even If You Beat.”
Average loans among the largest banks fell 6 percent in the first quarter from last year, according to the KBW analysts.
“Loans still make up half of bank revenues and loan growth is negative,” Brian Foran and Glenn Schorr, analysts at Nomura Holdings Inc. in New York, wrote in an April 14 note. “We have spent the last few weeks on the road visiting investors. The overwhelming feedback on banks has been ‘Why bother?’”
At JPMorgan, almost half of the New York-based bank’s earnings came from the release of reserves previously set aside to cover bad loans. Net revenue at the second-largest U.S. bank dropped 8.9 percent to $25.2 billion. Pre-provision profit fell 30.5 percent to $9.6 billion, the biggest drop since JPMorgan acquired Bank One Corp. in 2004. Shares have fallen 4.4 percent since the bank reported earnings.
Wells Fargo shares have slipped 5 percent since the San Francisco-based lender reported a 48 percent gain in first- quarter net income on April 20 to a record $3.8 billion. Net revenue at the fourth-largest U.S. bank by assets fell 5.2 percent, average outstanding loans declined by more than 5 percent and pretax pre-provision income slid 23.4 percent. At least $1 billion of Well Fargo’s record earnings came from releasing reserves that had been set aside for bad loans.
“A lot of the earnings growth was driven by continued reduction in loan-loss provisions, which the market has largely discounted,” said Jason Goldberg, a senior bank analyst at Barclays Capital in New York. “Investors’ attention has shifted to overall revenue or pretax pre-provision net revenue.”
‘Lack of Visibility’
Bank of America, the largest U.S. bank by assets and the only one of the six to miss analysts’ estimates, declined 5.3 percent after recording its first profit in three quarters on April 15. Net revenue at the Charlotte, North Carolina-based lender fell 17.2 percent from a year ago to $26.97 billion and pretax pre-provision earnings fell 55.1 percent to $6.9 billion, the biggest drop among the top six banks.
While New York-based Citigroup’s $3 billion profit beat analysts’ per-share estimates by 1 cent, net revenue fell 22.4 percent to $19.7 billion and pre-provision earnings plunged 47.9 percent to $7.1 billion. Shares are up 2.3 percent since the bank, the third-largest by assets, reported on April 18.
Goldman Sachs, which beat analysts’ estimates by 75 cents a share, also failed to generate investor enthusiasm. Shares are down 1 percent since the New York-based bank, the fifth-largest by assets, posted a 21 percent drop in first-quarter profit to $2.7 billion on April 19.
“Investor sentiment around the brokers centers almost entirely around the lack of visibility into the profit model going forward,” Barclays Capital analysts led by Roger Freeman told investors in an April 20 note.
Morgan Stanley (MS), operator of the world’s largest brokerage, is down 1 percent since the New York-based bank reported April 21 that first-quarter earnings fell 45 percent to $968 million. Revenue dropped 16 percent to $7.6 billion from $9.1 billion a year earlier.
Fee income on deposit accounts, asset management and securitization at federally insured banks has been falling, according to data from the Federal Deposit Insurance Corp. Deposit-account fee income across the industry fell by 20.7 percent in the fourth quarter from a year ago, the FDIC said in its most recent quarterly banking report. Banks are also losing fee revenue from new federal rules that limit the types and amounts of fees they can charge consumers, analysts said.
Lending has remained stagnant or is still contracting at most U.S. banks, according to the FDIC. Real estate loan balances at all FDIC-insured institutions, which represent more than half of outstanding bank credit, fell 4.4 percent in the fourth quarter to $4.27 trillion from $4.46 trillion last year, the FDIC said. New loans are earning significantly less yield, also cutting into revenue.
“You just have a persistent low-interest-rate environment, so as assets roll off, you’re putting new assets back on at a lower rate,” said Barclays’s Goldberg.
The impact can be seen on the combined pretax pre-provision profit of the six biggest lenders, which has fallen in each of the last four quarters compared with the same period a year earlier, according to Bloomberg data. The drop in the first three months of this year was the largest since the first quarter of 2008. Bloomberg figures exclude litigation and other non-operating expenses and income and may differ from those reported by the banks.
While banks have said credit-card lending will start to grow, investors have a hard time believing them, Foran and Schorr, the Nomura analysts, wrote.
“There are some real positives that are more than cosmetic -- credit improvement, capital markets not as bad as feared and reasonable valuation,” they said. “It’s just hard to get people to care about bank stocks right now.”
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