The Latest Batch of Earnings Disappoints

Five of the largest U.S. banks beat analysts' estimates for the first quarter, with JPMorgan Chase (JPM) and Wells Fargo (WFC) reporting record quarterly earnings. On closer inspection, the results are not all that impressive. As a group, the top six U.S. lenders reported the biggest percentage drop in quarterly revenue in three years, driven by lower lending and reduced fees. Net revenue at Bank of America (BAC), JPMorgan, Citigroup (C), Wells Fargo, Goldman Sachs Group (GS), and Morgan Stanley (MS) fell 13.3 percent in the first quarter from a year earlier, according to data compiled by Bloomberg. Pretax preprovision 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.

With unemployment stuck above 8 percent, housing prices falling, and new federal restrictions on how much banks can charge for services, investors have little appetite for bank stocks. The KBW Bank Index of the 24 largest U.S. banks has fallen 2.7 percent since Apr. 13, when JPMorgan was the first of the six banks to report results. The Standard & Poor's 500-stock index has climbed 2.5 percent over the same period. "We have spent the last few weeks on the road visiting investors," wrote Brian Foran and Glenn Schorr, analysts at Nomura Holdings, in an Apr. 14 research note. "The overwhelming feedback on banks has been, 'Why bother?' "

One reason for the lack of interest is that lending is stagnant or still contracting at most U.S. institutions. Average loans among the largest banks fell 6 percent in the first quarter from last year, according to an Apr. 20 research note by Melissa Roberts and Elissa Niemiera, analysts at Keefe, Bruyette & Woods (KBW). 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," says Jason Goldberg, a senior bank analyst at Barclays Capital in New York.

Fee income on deposit accounts, asset management, and securitization at federally insured banks has been falling. Deposit account fee income across the industry dropped by 20.7 percent in the fourth quarter from a year ago, the Federal Deposit Insurance Corp. said in its most recent quarterly banking report. Banks are also losing revenue as a result of new federal rules that limit the types and amounts of fees they can charge consumers. The impact can be seen on the combined pretax preprovision profits of the six biggest banks, which have fallen in each of the last four quarters vs. 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.

While banks have said credit-card lending will start to grow, investors have a hard time believing them, Foran and Schorr 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."

The bottom line: Stagnant lending and lower fee income is crimping earnings at big U.S. lenders. A bank stock index has dropped 2.7 percent since Apr. 13.

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