Big banks' fourth-quarter earnings kicked off Tuesday as JPMorgan Chase (JPM) and Wells Fargo (WFC) reported higher profits but lower revenue vs. a year earlier as litigation costs and rising interest rates hampered their growth.
JPMorgan earned $1.40 a share, up a penny from Q4 2012. Analysts polled by Thomson Reuters expected $1.35. Revenue fell 1% to $24.1 billion, though that topped estimates of $23.7 billion.
Wells Fargo's EPS rose 9% to $1, beating estimates. Revenue fell 6% to $20.67 billion, just short of analysts' predictions of $20.69 billion.
Both banks face the challenge of keeping EPS up as years of cost-cutting run their course, new regulations crimp profitability and mortgage activity continues to shrink.
Litigation woes have slowed JPMorgan. On Jan. 8, the bank agreed to pay $2.6 billion to settle criminal and civil charges alleging it failed to notify officials about Bernard Madoff's Ponzi scheme before the fraud was exposed in 2008. Madoff is serving a 150-year federal prison sentence for securities fraud.
"It was in the best interests of our company and shareholders for us to accept responsibility, resolve these issues and move forward," CEO Jamie Dimon said in a statement.
Late last year, JPMorgan agreed to pay $13 billion to settle claims it routinely overstated the value of its mortgages to investors. Last September, it also paid nearly $1 billion to resolve probes of a series of derivatives losses dubbed the "London Whale.
JPMorgan and other big banks face more litigation costs ahead.
Most divisions of the nation's largest bank reported higher profit, but its investment banking business saw a 57% decline due to JPMorgan changing the value of some of its investments.
JPMorgan did report sluggish growth in fee income and loan volume as refinancing slowed in response to rising home-loan rates. JPMorgan laid off 11,000 in its mortgage unit last year.
Despite a "noisier quarter than expected" due to high-profile litigation, JPMorgan continued to perform solidly in its credit card, commercial banking and asset management units, said Jeffery Harte, a principal at Sandler O'Neill & Partners.
"They're kind of maintaining that leadership position across businesses," Harte said.
Fixed-income trading revenue edged up 1%, defying forecasts for an 11% drop.
Mortgage Demand Taper
Wells Fargo, the top U.S. mortgage lender, also has faced a challenging environment, axing thousands of employees in its home-loan unit as demand fell on rising rates ahead of the Federal Reserve's taper.
Mortgage originations sank to $50 billion from Q3's $80 billion and Q2's $112 billion. A weaker pipeline suggests further mortgage declines in the new year.
The Fed started to scale back bond buying this month, but Treasury yields and mortgage rates have pulled back from recent highs so far in 2014.
Wells beat profit estimates partly due to releasing $600 million of its loan loss reserves. Major banks have slashed such reserves over the last several quarters as conditions improve, flattering the bottom line.
The bank also reported a 10% boost in its net income to $5.6 billion compared to a year ago.
CFO Tim Sloan said in a statement said Wells had a "very good" Q4 despite a "challenging rate environment.
Despite higher interest rates and hefty legal bills, both banks performed strongly in 2013 with shares for each rising 33%.
JPMorgan edged higher and Wells dipped Tuesday.
Loan growth was a pleasant surprise for Wells, but "expenses were disappointing," said Keith Murray, an analyst at ISI Group.
But Wells expects revenue to outpace costs in 2014, he said.
"They're feeling like they're set up well to improve the efficiency ratio," Murray said.
Big banks' earnings continue with Bank of America (BAC) on Wednesday, Citigroup (C) and Goldman Sachs (GS) on Thursday and Morgan Stanley (MS) on Friday.
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- JPMorgan Chase