What Investors Learned From BofA and Wells Fargo Earnings

  • Consumer lending shows cracks on second day of earnings season
  • The four largest U.S. banks cut combined workforce after pause

What Bank Earnings Signal About Financial Industry

Signs of trouble in consumer lending, renewed pressure to shrink staff and a slump in trading are rapidly becoming the big themes as U.S. banks post quarterly results.

On the second day of the industry’s earnings season, Bank of America Corp. and Wells Fargo & Co. posted figures that tracked some of the key trends from earlier reports by JPMorgan Chase & Co. and Citigroup Inc. Every member of that group is preparing for the possibility that more people might struggle to pay their debts. And at Wells Fargo, a long-running probe related to mortgages had an impact, prompting the firm to book a $1 billion legal charge that made it the only lender among the four to miss analysts’ profit estimates.

Read more: Muted trading erodes profits at JPMorgan, Citigroup

Here are Friday’s takeaways for investors.

Consumer Credit

All four banks boosted provisions for consumer-loan losses from the previous quarter, some prompted by an uptick in bad credit-card debt. Higher reserves can be a leading indicator for a turn in the credit cycle, but Bank of America Chief Financial Officer Paul Donofrio played down that concern. “We feel very good about our card portfolio,” he said. “Nothing here, from our perspective, unusual.”

Charles Peabody, a banking analyst at Compass Point Research & Trading, was less optimistic on Bloomberg Television after results began pouring in Thursday. “We’re at an inflection point in credit,” he said.

Interest Income

Bank of America and Wells Fargo joined JPMorgan in reporting an increase in net interest income. At Bank of America, it jumped to the highest level since 2011. Three rate hikes in the past year have increased lending margins. At Citigroup, revenue from that business slipped slightly from a year earlier.

Mortgage Costs

Wells Fargo booked a $1 billion charge in the quarter for a previously disclosed regulatory probe related to its handling of mortgages before the 2008 financial crisis. That left per-share earnings 19 cents short of the $1.03 average estimate of analysts. Bank of America lost $20 million in mortgage banking, reflecting a roughly $100 million increase in provisions for representations and warranties, a form of legal protection for investors. The firm also cited less favorable valuations on mortgage-servicing rights for the decline.

Cutting Staff

After a two-quarter pause, most of the banks returned to a longstanding strategy -- eliminating jobs -- to improve profitability. JPMorgan was alone in adding employees during the third quarter.

Hurricanes’ Impact

The banks also began commenting on the impact of the quarter’s unusually harsh weather, in which hurricanes Harvey, Irma and Maria tore through Texas, Florida and Puerto Rico, respectively, inflicting billions of dollars of damage. Wells Fargo booked a $450 million provision for potential loan losses tied to the storms. Bank of America said there was a “modest increase” in provisions, but declined to specify a number.

— With assistance by Laura J Keller, and Dakin Campbell

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