Dimon Joins Moynihan in Disappointing Investors
The KBW Bank Index (BKX), tracking shares of 24 U.S. lenders, has slid 4.9 percent since April 11, the day before JPMorgan and Wells Fargo & Co. (WFC) kicked off the industry’s quarterly reports. That’s the index’s worst performance during the six largest banks’ earnings season since 2010’s second quarter.
Bank of America, JPMorgan, Wells Fargo, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) shares declined even as four of them had net income that beat analysts’ estimates. With combined revenue down 2.5 percent excluding accounting charges, firms relied on a mix of tax benefits, headcount reductions and decreased expenses from bad debts and litigation to help fuel profits.
“They’re making their numbers for all the wrong reasons,” said Michael Mullaney, the chief investment officer at Fiduciary Trust, which manages about $9.5 billion including shares of Wells Fargo and JPMorgan. “It’s definitely troublesome.”
Sputtering revenue is starting to erode a U.S. bank-stock rally that peaked March 15. After climbing 63 percent in the 17 1/2 months leading up to that date, the KBW Bank Index has slid 6.1 percent. The Standard & Poor’s 500 Financials Index (S5FINL) of 81 companies has fallen 3.4 percent since mid-March, compared with a 1.2 percent decline in the broader S&P.
Among the six banks, only Citigroup Inc. (C) rose during earnings season, climbing 0.5 percent. The third-largest U.S. lender by assets, led by Chief Executive Officer Michael Corbat, 52, posted a 30 percent jump in profit, as fixed-income trading and investment banking exceeded analysts’ estimates.
JPMorgan, the biggest U.S. bank, and San Francisco-based Wells Fargo, the nation’s largest mortgage lender, both reported record quarterly net income. They also posted the only decreases in revenue as earnings from home loans slumped. Those units thrived last year as record-low interest rates encouraged customers to refinance.
“We really thought that mortgages were going to be the salvation in 2013,” Mullaney said. “That’s somewhat suspect right now based on the numbers that are being reported.”
As banks struggle to increase revenue, they’ll probably trade a narrowing of their net interest margin, a gauge of lending profitability, for loan growth and mortgage production, Goldman Sachs analysts led by Richard Ramsden said today in a note. JPMorgan said last week mortgage volume climbed 37 percent and lending margins narrowed to 2.37 percent from 2.61 percent a year earlier.
Morgan Stanley and Goldman Sachs, which aren’t in the KBW Bank Index, declined after trading results disappointed. New York-based Morgan Stanley’s trading revenue fell the most, with bond-trading revenue plunging 42 percent and equity-trading revenue down 19 percent. Goldman Sachs, run by Lloyd C. Blankfein, 58, said revenue from trading declined 12 percent.
Excluding accounting charges tied to the firms’ own debt, known as debt-valuation adjustments, combined profit rose about 15 percent.
What firms need “is an environment in which global trading and investment-banking revenues grow reasonably in line” with global nominal gross domestic product, Chris Kotowski, an analyst at Oppenheimer & Co., wrote in an April 16 note. “Until this happens, the earnings leverage is achieved on the expense side, and this is finite.”
Brian T. Moynihan, the 53-year-old CEO of Charlotte, North Carolina-based Bank of America, has made lowering risk a priority. He cited that as one reason the firm’s trading revenue fell 13 percent in the quarter, including a 20 percent drop in fixed-income, currencies and commodities that was worse than at most rivals. It was the only firm to report net income that fell short of analysts’ estimates. Trading-revenue figures exclude accounting charges.
U.S. regional banks also have been cutting costs and setting aside less for sour loans to bolster profit. Net income at Minneapolis-based U.S. Bancorp (USB), the nation’s largest regional lender, climbed 6.7 percent as the company decreased its provision for loan losses. Revenue fell 1.1 percent and missed analysts’ estimates.
To compensate for flagging revenue, the six biggest banks cut expenses by 6.1 percent to a combined $71.6 billion. JPMorgan led firms announcing job reductions in the first quarter, planning as many as 17,000 cuts through 2014. CEO Jamie Dimon, 57, shrunk its investment bank’s pay pool by 7 percent from a year earlier. Morgan Stanley, led by CEO James Gorman, 54, cut its institutional securities unit’s compensation pool by 14 percent.
“We are leery of large investment-banking businesses and trading operations because it seems to be under siege,” Mullaney said. “You see people being laid off left and right because the business is not there right now.”
Citigroup’s profit jump also was aided by a $700 million tax benefit and a decline in reserves for loan losses, which fell 16 percent. Altogether, JPMorgan, Bank of America, Citigroup and Wells Fargo set aside 25 percent less for loan losses in the first quarter than the same period last year.
“The ones that are succeeding right now are the ones that have the ability to move the needle on costs,” Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said of banks’ profits.