Dimon and Moynihan disappoint investors as revenue sputters

April 19, 2013 04:51 AM

Bank of America Corp. and JPMorgan Chase & Co. led the six largest U.S. banks in boosting combined first-quarter profit 45%. Investors dumped the stocks.

The KBW Bank Index, tracking shares of 24 U.S. lenders, has slid 4.9% since April 11, the day before JPMorgan and Wells Fargo & Co. 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. and Morgan Stanley shares declined even as four of them had net income that beat analysts’ estimates. With combined revenue down 2.5% 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% in the 17 1/2 months leading up to that date, the KBW Bank Index has slid 6.1%. The Standard & Poor’s 500 Financials Index of 81 companies has fallen 3.4% since mid-March, compared with a 1.2% decline in the broader S&P.

Among the six banks, only Citigroup Inc. rose during earnings season, climbing 0.5%. The third-largest U.S. lender by assets, led by Chief Executive Officer Michael Corbat, 52, posted a 30% jump in profit, as fixed-income trading and investment banking exceeded analysts’ estimates.

Record Profits

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.”

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% and equity-trading revenue down 19%. Goldman Sachs, run by Lloyd C. Blankfein, 58, said revenue from trading declined 12%.

Excluding accounting charges tied to the firms’ own debt, known as debt-valuation adjustments, combined profit rose about 15%.

‘Finite’ Improvement

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% in the quarter, including a 20% 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, the nation’s largest regional lender, climbed 6.7% as the company decreased its provision for loan losses. Revenue fell 1.1% and missed analysts’ estimates.

Expense Reductions

To compensate for flagging revenue, the six biggest banks cut expenses by 6.1% 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% from a year earlier. Morgan Stanley, led by CEO James Gorman, 54, cut its institutional securities unit’s compensation pool by 14%.

“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%. Altogether, JPMorgan, Bank of America, Citigroup and Wells Fargo set aside 25% 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.

Bloomberg News

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