By Christina Rexrode, Peter Rudegeair and Emily Glazer
Earnings from the nation's three biggest banks backed investor
hopes that a Trump presidency would bring less regulation and
stronger economic growth that reinvigorates the financial
sector.
The fourth-quarter performance of J.P. Morgan Chase & Co.,
Bank of America Corp. and Wells Fargo & Co. was largely in line
with what Wall Street had expected: Trading revenue was upbeat
thanks to increased market activity and volatility following the
election; expenses remain in intense focus; credit quality
continues to improve; and a recent upward move in interest rates
should eventually produce gains in banks' income.
Investors viewed the results positively enough that they
continued to nudge the banks' stocks higher. Financial stocks have
driven much of the postelection rally, notching gains more than
three times those of the broader markets.
Shares of J.P. Morgan, Bank of America and Wells Fargo, which
are all up more than 20% since Donald Trump's win, rose 0.5%, 0.4%
and 1.5%, respectively, on Friday. The Dow Jones Industrial
Average, which has flirted with the level of 20000 in recent weeks,
closed down less than 0.1%, to 19886.
J.P. Morgan, the country's biggest bank by assets and the
world's largest by market value, was the standout performer in
Friday's earnings parade. Its quarterly profit of $1.71 a share
handily outpaced analyst expectations, largely due to strong
trading results. Full-year 2016 net income of $24.73 billion was a
record for the bank.
Bank of America's earnings per share of 40 cents beat analyst
expectations as the bank cut enough expenses to offset
lower-than-expected revenue. At $17.91 billion, its 2016 net income
was its biggest annual profit in a decade.
Wells Fargo reported lower fourth-quarter earnings and revenue,
at 96 cents a share and $21.58 billion, that both missed analysts'
expectations. The bank's shares rose after it repeatedly referenced
a charge related to interest-rate moves as the reason for coming in
below estimates.
Wells Fargo said its customer loyalty and satisfaction scores
were down versus a year earlier as the bank struggles to recover
from its September sales-tactics scandal.
Big-bank earnings continue this coming week with Morgan Stanley
reporting on Tuesday and Citigroup Inc. and Goldman Sachs Group
Inc. following on Wednesday.
The burden is now on banks to live up to heightened investor
expectations while showing that increased profits are
sustainable.
"It was an OK quarter for the banks," said Jeff Morris, head of
U.S. equities at Standard Life Investments, adding that the
market's reaction shows banks don't need to be "continually fueled
by good news."
Mr. Morris, whose firm collectively owns more than 40 million
shares of the three banks, said the potential for more
interest-rate rises are helping the stocks most, while possible
deregulation in a Trump administration "is a topic of debate."
And while many investors now believe a turn in the interest-rate
cycle is at hand, which would bolster bank profits, rates remain
superlow by historical standards. That continues to drag on
results: Wells Fargo's quarterly return on equity hit its lowest
level in years at 10.94%.
Wells Fargo Chief Financial Officer John Shrewsberry
acknowledged that the market has lifted bank valuations based on
more than current performance. "Now banks need to, over some period
of time, demonstrate how they're going to earn into that," he said
in an interview.
At Bank of America, CLSA analyst Mike Mayo asked officials
during a conference call for a timeline on when they might meet
goals on profitability measures such as return on assets and
equity. Bank of America's return on equity in 2016 was just 6.71%,
its highest level in five years but still well below banks'
theoretical cost of capital of 10%.
CFO Paul Donofrio replied to Mr. Mayo that the bank was moving
in the right direction but wouldn't set a time frame. Mr. Mayo's
response: "It seems like, from an investor standpoint, you get a
free pass. 'When you get there is when you get there.' "
Speaking a week before Mr. Trump's inauguration, bank officials
offered vague support for anticipated tax overhauls and regulatory
relief but didn't enumerate specific requests they might want from
the new administration. They also expressed optimism about the
economy over the coming year.
Among specific businesses, trading continued to gain ground.
After a brutal start in 2016, trading activity ramped up following
the U.K.'s vote to leave the European Union in June and accelerated
after Mr. Trump's election. At J.P. Morgan and Bank of America,
annual trading revenue for 2016 increased above year-earlier levels
for the first time in at least three years.
In the fourth quarter, J.P. Morgan's trading revenue climbed
24%, and Bank of America's rose 11%. Wells Fargo's relatively small
presence in trading has sometimes been an advantage in recent years
but has been a handicap of late.
Still, it isn't clear how long the trading jolt can continue.
Bank of America noted the postelection rise in long-term bond
yields had slowed demand for trading municipal bonds and other
products tied to interest rates.
Consumer banking was less buoyant. Revenue was down at J.P.
Morgan and Wells Fargo versus the prior year, and flat at Bank of
America. Mortgage-banking revenue was also challenged due to the
rise in interest rates and looks set to continue falling this
year.
Reflecting a persistent emphasis on cost controls, executives
held the line on pay for traders and investment bankers.
Compensation expenses in J.P. Morgan's corporate and investment
bank was 20% of revenue in the fourth quarter, down from 27% in the
third period.
The cost-cutting drive continued in other parts of banks. Bank
of America CEO Brian Moynihan has made expense savings a key part
of his business strategy, and the company cut annual expenses
nearly 5%, to $54.95 billion. Mr. Moynihan promised this past
summer to reduce annual expenses to about $53 billion by 2018.
On the plus side, all three banks released reserves they had set
aside for loan losses, in part due to improvement in credit
quality. Such reserve releases bolster profit. Meanwhile, the
rebound in oil prices removed one of the biggest challenges to bank
profitability, alleviating concerns about defaults among the banks'
energy-related clients.
The Federal Reserve's December decision to raise interest rates
had little immediate impact on the banks' fourth-quarter results
but made them hopeful about the coming year.
At Bank of America, officials said they expect an extra $600
million in net interest income in the first quarter. In the fourth
quarter it posted $10.3 billion of such income. Bank of America is
particularly dependent on the Fed increasing interest rates because
of its large base of U.S. deposits and rate-sensitive mortgage
securities.
Write to Christina Rexrode at christina.rexrode@wsj.com, Peter
Rudegeair at Peter.Rudegeair@wsj.com and Emily Glazer at
emily.glazer@wsj.com
(END) Dow Jones Newswires
January 14, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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