JPMorgan Citi and Wells beat forecasts and take hits

The first three big U.S. banks to report second quarter earnings beat expectations, but their shares fell, as trading revenues and mortgage woes deepened.

JPMorgan targets loans

JPMorgan got the bank season off to a stronger than expected start with its best ever quarterly net income of $1.82 per share. Its key outperformance was in lending, with higher borrowing across residential mortgages, business loans, credit cards, and auto loans. This indicates that it targeted loan market share whilst rivals struggled. JPM’s average core loan book rose 8% in Q2.

Although JPM was chief beneficiary in mortgages in Q2, it wasn’t immune to underlying weakness. Its mortgage fees and loan servicing revenues fell 41% as borrowers continue to shy away from refinancing as rates rise. Mortgage and loan malaise is therefore turning out to be one of the biggest concerns for the largest U.S. banks despite higher net margins.

The underside of JPMorgan’s dominance of loan growth left it more exposed to rising risks in that segment. It reported a $252m rise in cash set aside for defaults in credit card lending, lifting ‘charge-offs’ above 3%, well above Q1 and Q2 2016 levels. Whilst JPMorgan’s quarterly provision for credit losses overall fell 14% year on year to $1.2bn, investors seem concerned that credit provisions may have to rise again. Its executives have been warning investors to prepare for credit card loss rates to go up.

Trade slows

Large U.S. banks that have kept a foot in trading have also warned activity in that business would cool too. These cautions and the extent of softness in the second quarter suggest weakness will continue in forthcoming quarters. As the biggest gainer from trading among peers of late, JPMorgan saw one of the biggest come-downs. The declines looked worse due to a surge in the same quarter a year ago ahead of the Brexit vote. Volatility being trapped at multi-decade lows is compounding the hit. JPM’s market revenues fell 14% to $3.22bn, with bond trading the biggest drag in its first markets revenue decline in 5 years. Citigroup was harder hit in stock trading, where revenues fell 11%, vs. JPM’s 1% fall, though Citi’s fixed income fall was 6% against a 19% fall at its rival. Indeed Citigroup’s overall better-than-feared quarter was helped by trading revenue holding up above forecasts.

Wells’ dry outlook

For Wells Fargo, which has negligible trading businesses compared to its rivals’, headwinds seem to be mostly on the mortgage front, trimming total revenues a smidgeon short of expectations to $22.17bn. The big U.S. lender most reliant on residential and commercial property loans saw an 18.8% fall in mortgage income. It’s still biggest U.S. provider of commercial real estate loans but grew slower than the market, said its CFO.  

John Shrewsberry also conceded, in candid comments that its auto loans book would continue to decline. That would surrender more market share to JPMorgan which is ramping up in that market. And whilst expenses rose at all three banks reporting on Friday, only Wells’ CFO pointed directly to a wider potential rise in litigation costs—seen up $1.3bn at WFC over the year.

Wells did manage to lift net interest income by 17% to £12.5bn, painting a punchier view than JPMorgan, which forecast a fall of 11% to $4bn in 2017. WFC also cut loan-loss provisions in half. However, this was down to improvements in energy loans. Energy prices relapsed around quarter-end, so its provisions may not be out of the woods.

The hit

JPMorgan and Wells Fargo shares fell in pre-market trading hadn’t recovered much at the time of writing. Citigroup’s lower-across-the-board quarter kept its stock pressured too. Whilst only Wells and JPMorgan statements offered direct outlook commentary, prospects for a more fallow second half than last year’s for all three banking titans were clear enough.