Upbeat JPMorgan, Wells Fargo Fail To Impress Investors
Better-than-expected results from JPMorgan Chase (NYSE:JPM - News) and Wells Fargo (NYSE:WFC - News) failed to impress investors Friday, setting a damp tone for a slew of other big financials waiting on deck to report.
The two banks, among the best-performing in their industry, both said the mortgage market is improving, with more demand and lower charge-offs.
But Wells Fargo fell 3.5% and JPMorgan nearly 4%, in part as the broader market tumbled on China and Spain concerns.
"These are the best of the best. They're just not up to the expectations of the market right now," said Rob Lutts, president and chief investment officer of Cabot Money Management.
JPMorgan's earnings per share rose 2% to $1.31. Revenue grew 6% to $27.4 billion. Analysts had expected EPS to drop to $1.18 on revenue of $24.68 billion.
Investment banking net income of $1.7 billion was up 134% from Q4, but down 29% from a year earlier. The bank reduced its loan-loss reserves by $1.8 billion for its improving mortgage and credit card portfolios. But it added $2.5 billion to reserves to cover mortgage-related litigation.
Wells Fargo reported 75 cents earnings per share, up from 67 cents a year ago and 2 cents better than consensus estimates. Revenue climbed 6% to $21.6 billion from the prior year, beating forecasts for $20.59 billion.
Home Loan Demand Up
The No. 1 U.S. mortgage lender said home loan applications climbed 20% from Q4, with much of that coming from refinancing the current near-record-low rates. It decreased its allowance for loan losses by 14%, or $3.1 billion from a year ago.
The entire sector is suffering through those low rates, which crimp their net interest margins.
Banks also face a slew of new regulatory rules and capital requirements.
Lutts said banks have proved adroit at adapting to various regulatory environments while remaining profitable, though it can take time.
"I think there's concern that the legislation that was put in has really caused the banks to change the way they operate, and I really think investors are having a hard time getting a handle on that," he said.
After passing the Federal Reserve's stress tests, JPMorgan was cleared in March to raise its dividend by 20% and initiate a $15 billion share repurchase program. That same day, Wells Fargo hiked its 12-cent quarterly dividend to 22 cents.
On Monday Citigroup (NYSE:C) reports, with analysts expecting flat EPS of $1. Goldman Sachs (NYSE:GS - News) comes Tuesday, with analysts forecasting a 128% surge in earnings to $3.55 per share.
American Express (NYSE:AXP - News) is on deck Wednesday. Bank of America (NYSE:BAC - News), Capital One Financial (NYSE:COF - News) and Morgan Stanley (NYSE:MS - News) are due out Thursday. Shares of all these financials fell Friday, with BofA and Morgan Stanley down 5%.
Analysts are forecasting 7.3% aggregate earnings growth for financials within the S&P 500.
Keefe, Bruyette & Woods analyst Fred Cannon thinks JPMorgan's results bode well for some rivals, including improving investment banking for Goldman and better mortgage markets for BofA.
But overall "we see JPM's quarter as a mostly neutral event," he wrote.
In an investor conference call, Wells CEO John Stumpf said the home mortgage market was at or near a bottom, citing already plummeted prices, rising rents and low rates.
Though loan delinquencies and foreclosure volumes are still lumpy, JPMorgan CEO Jamie Dimon also thinks the market has turned.
But he offered a caveat on the conference call: "If the United States goes back into recession, all bets are off."
