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JPMorgan Chase and Wells Fargo led the way for bank
earning season this morning with record quarters but it wasn’t enough to keep their investors happy.
JPM and Wells reported record earnings today with $5.7 billion and $4.9 billion respectively. The figures did not reassure skeptical bank investors who sent shares of both banks down significantly this afternoon.
Wells Fargo shares are down over 3% while JPM shares are taking a 1.6% hit so far today.
What gives? JPM blew analysts’ estimates away and Wells just missed revenue estimates bringing in $21.2 billion instead of the expected $21.47 billion.
For Wells Fargo, much of the problem was a greater than expected drop in its net interest margin. It’s a key way banks make money–the difference between the amount they make on loans and what they pays for the funds.
For the San Francisco bank, the margin was down 25 basis points from the previous quarter to 3.66%. The bank said in September that the decline would be roughly 17 basis points. Here’s how Barclays analyst Jason Goldberg accounts for the decline:
- lower income from variable sources (fee and PCI loan resolutions) caused a decline of 10bps
- given its cautious stance on securities portfolio growth in the current low rate environment, deposit growth of $23bn caused cash and short term investments to increase, diluting the margin by 7bps
- the impact of lower rates, both in terms of run-off and new activity, reduced the margin by 8bps (6bps AFS, 2bps loans)
“Could we see another 18 to 20 basis points decline in the year, sure we could. Could it be up to 25, you bet. Could it be 15, right, and so that you could see that much change, but we could also see another quarter in the next quarter where it’s up,” CFO Tim Sloan said.
But the perhaps a key point about Wells Fargo’s NIM figure came when Sloan suggested that the bank “could have easily increased our net interest margin by making some bad short-term decisions.”
What’s he mean by that? The bank could have seen a bigger bank for its buck had it made riskier bets in its portfolio. But alas, that’s never been the conservative bank’s style.
“We could go out and buy a lot of securities that have good short-term yield, but have higher credit risk. That maybe a good short-term decision in terms of managing to the net interest margin. It could be a bad long-term decision in terms of how we’re managing this company for the long-term which again is why we don’t spend the whole lot of time being focused on managing to that margin,” Sloan added.
JPMorgan meanwhile had a great all-around quarter considering it’s coming off a massive $6 billion trading loss just a quarter ago. The bank said it only suffered a “modest” loss from unwinding what’s left of the London Whale trade.
And much like Wells JPMorgan Chase also got a big boost from its mortgage business in the quarter. Revenue was up 36% to $1.8 billion (excluding the impact of repurchase losses). CEO Jamie Dimon was confident enough to tell investors that the housing market “has turned the corner.”
Much of the mortgage activity for banks however is on the re-financing side rather than actual home purchasing activity. (For Wells re-financing makes up 75% of the mortgage business volume.) That may leave some investors wondering how sustainable the mortgage boost will be down the road.
There wasn’t much to write home about in terms of revenue growth else where (except JPM did see a 33% increase in fixed-income trading and a similar bump in i-banking fees) and that seems to be what bank investors are still holding out for.
Real, sustainable top-line growth is something even the two biggest and safest banks have yet to show their investors–and they are responding accordingly.
That may not bode well for the sector’s two more vulnerable big banks, Citigroup and Bank of America, which report on Monday and Wednesday
respectively.
source: forbes.comc
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