Is JPMorgan’s Miss a Sign of Things to Come?

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April 11 (Bloomberg) –- Graham Fisher Managing Director Josh Rosner discusses JPMorgan earnings and the state of the banking industry with Trish Regan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Citi and bank of america open their books early next week and goldman and morgan stanley, it will be a busy week.

We could see a mixed bag.

Wells fargo beat estimates in the first quarter, the leader in home lending said fewer customers missed loan payments.

That's good news.

But jpmorgan fell short, basically on all accounts.

The bank reported lower revenue, from fixed-income trading and mortgages.

I'm joined by josh rosner, a bank analyst from graham fisher.

What happened?

Well, both of them had weak top lines, and that's something that's the reality for our largest banks.

There's not a lot of growth opportunities.

We have a regulatory environment that's trying to force them to become narrower and narrower banks, and i think that is specifically the difference right here between j.p.m. and wells fargo.

What's the difference?

I would agree that they're both struggling with a tougher regulatory environment.

They're both struggling top line.

Wells obviously is directly hit more by mortgages, though they have the mortgage servicing portfolio which was a support.

At the end of the day, though, trading is a business that the fed wants the banks to be less and less involved in on the prop side.

Sure.

That's going to hurt a jpmorgan.

Exactly.

We have the same thing on the commodities side, where jpmorgan is exiting the business, and the operating leverage is actually stalling out.

Loan loss reserve releases that we've seen over the past several years are not there in the same way that they've been and the ability to manage operating expenses generally is worse than it's been.

One of our best industries in this country -- well, for better or for worse, after 2008 people would say it was not exactly our best industry or to be the most proud of.

But one of our traditionally strongest industries has been the financial services industry.

So as we see more and more regulation creep into this, what is it doing to our overall industry, such an important part of our economy?

I think it's important that you distinguish between our, let's say, top six, top 10 banks and the rest of our banking industry.

The other 5,000. and you can see that actually in what's going on in the commercial and industrial loan area at a jpmorgan, at a wells, at a citi, where you're essentially driving revenue growth, volume growth in loans, by slashing the yields on your commercial and industrial loan portfolio.

So the average big banks loan portfolio is now yielding under 4%. where if you look at our smaller banks, they're all above 4%. most of them are sort of in that 5% to 6% range.

So it looks like did so they can't make any money.

Right.

So the net interest margin is getting crushed.

Let's get back to the fed, which we were talking about earlier.

The banks can't make any money, they're not incentivized to lend.

I was just going to go there.

Consumers don't really seem to be clamoring to get the loans in the first place.

That's right.

So does the fed need to rethink what it's doing in order to create better demand?

Well -- and more incentive for banks?

Do they need to rethink that we're doing in terms of better demand?

I've argued for a long time, if you look historically, small and medium-sized enterprises where a backbone of our consumer economy, and that's the one area that the fed hasn't been able to focus on or target effectively with q.e. and other policies.

Bank of england on the other side -- and as i say, really reached out and said we're going to do funding for lending.

So we're going to tie your cost of funds to the amount of loans that you make to these underserved markets more effectively.

The fed hasn't gone there.

But it does not seem like -- you want to talk about regulation, that's the overincentivizing, overregulating.

No, it's trying to drive, trying to use a fine he point to get what the fed was after, which was lending.

The lending isn't there where you would want it.

Let me ask you about citi, because they're going to be reporting next week.

The c.e.o. came out and said this is unfair what the fed is doing, these stress tests with these qualitative versus quantitative results.

These are my words.

Basically bogus, not fair.

What are we going to see out of citi next week?

I think we're going to see a struggle at the top line.

Some operating efficiency passing through to the bottom line.

But citi actually has an easier go of returning value to shareholders if they really get aggressive, because they haven't integrated all their businesses as thorly.

And you're starting to see them peel off businesses more than jpmorgan or wells fargo.

So the big supermarket banking model doesn't work the way it used to.

Interesting.

That's a major story that the new york fed has written on, and they just put out a paper on.

And the operating efficiencies are not really there.

Better get smaller.

This text has been automatically generated. It may not be 100% accurate.

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