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Bank earnings: Wells Fargo misses as mortgage income craters, Citigroup beats

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Yahoo Finance Live anchors discuss quarterly earnings for Wells Fargo and Citigroup.

Video Transcript

JULIE HYMAN: We got to talk about banks, too. And we're getting, of course, more second quarter reporting from the banks today following the downbeat numbers from Morgan Stanley and JP Morgan today with Citi and Wells Fargo. They showed more of a mixed picture for big banks. Let's bring in back in Brian, who can talk about that as well. And it seems like Citi was sort of the standout to the upside here and Wells showing continued weakness.

BRIAN CHEUNG: Yeah, let's start off with Wells because I think, again, the story with the banks is, we really want to look at what they see in terms of concerns about a recession. And when you take a look at the housing picture, this is the most exposed bank to the housing sector. They missed on both the top and bottom lines. Big reason for that-- mortgage income cratering due to higher rates, right? That makes sense. Fed raises interest rates. That makes it more expensive to get a mortgage, so you're going to see originations go down. Why would anybody refi in this environment?

So you saw those volumes go down as well. Double digit decline in mortgage income for this company when you consider that it used to be an over $1 billion revenue line. It declined 79%. Again, not a typo. That was down to about $300 billion if you round up on the-- as far as that revenue line goes. Now, management was saying they expect things to actually remain challenging for the next few quarters. And that is in line with what we've seen with what JP said as well, in terms of whether or not they are concerned about an uptick in an inability to repay.

Now, when we take a look at Citigroup, though, why did they beat, right? Because shares are up almost 5%. Now, this morning, they did beat on the bottom line, although they did also beat on the top line. A big reason for that had nothing to do with anything consumer related. It has to do with a 28% year over year increase in their treasury and trade solutions.

Now, very boring stuff before our viewers start to fall asleep here. Essentially, this is them helping international businesses handle payments, manage liquidity. They earn money on interest. So interest rates go up. That makes that more profitable for them. Jane Fraser actually calling it out in the earnings release saying that company-- or that business line was firing on all cylinders.

And that made up for the fact that when you take a look at their institutional clients group revenue breakdown, they saw investment banking revenues really fall quite a lot. We saw the same thing with JPMorgan Chase yesterday as well. So those types of compens-- you know, look at investment bank account, 28%. So, again, Citigroup up by 5% because they were able to lean on these kind of Wall Street and kind of B2B businesses to make up for the revenue losses. Wells Fargo a bit of a different story.

JULIE HYMAN: I just wanted to mention-- and this is something that was breaking just as we were coming to air. On a call with the media, the CFO of Citi said that they, too, are going to be pausing share buybacks. Now this is similar to what we heard from JPMorgan. So it's interesting--

BRIAN CHEUNG: Not Wells Fargo, though.

JULIE HYMAN: Right, and it's not weighing on Citi in the same way because of the rest of the context.

BRIAN CHEUNG: Yeah, well, here's the thing is that why would a big bank, which they have plenty of cash, suspend their share buybacks in this situation? Because you still have management like JPMorgan's Jamie Dimon yesterday saying, well, the consumer still looks very good. Well, you're doing that because, first of all, the banking regulations in this country require banks to hold on to a significant amount of capital to meet requirements. It's the only industry that requires regulators to approve their plans for dividends and share buybacks.

So they already have a minimum to meet. They already had their stress tests this year. But what Citi and JPMorgan Chase is doing is essentially saying, well, we know that these recessionary concerns coming around the corner. We might want to save some of our capital today so that we can continue to meet regulatory requirements in the future if there is a downturn.

One way you can do that is by cutting back on what you're dishing out to your shareholders. You're going to go to share buybacks, spend those first before you try to decline the dividend, right? You want to make sure you can keep that recurring revenue stream for shareholders. But again, that's the first step. That's what you're seeing from Citi and JP Morgan Chase.

BRIAN SOZZI: What stood out to me too in this Citi results, Brian, is-- not to make it too complicated-- expenses grew slower than sales. Citigroup under Jane Fraser has been on this really focused mission, before this economic slowdown, of cutting expenses throughout the organization. And now you take a step back, and you did not get that same type of tone or message at a JP Morgan and Morgan Stanley, that maybe those companies are behind the curve in slowing hiring and cutting expenses into this economic downturn.

BRIAN CHEUNG: And for what it's worth, to Jane Fraser's credit, I mean, this is a story that kind of is agnostic to kind of the pandemic or the economic reopening, right? This has a lot to do with Citi's post-2008 restructuring, right? We know that Citigroup was too exposed to many different types of businesses that they probably shouldn't have been in 2008.

So under Mike Corbat, the previous CEO, and now, under Jane Fraser, they've been going about this effort to streamline the business, focus a little bit more on their international markets of focus because they've exited a number of markets where they were trying to compete, but simply just couldn't beat out the incumbents in those areas. And they're trying to focus on those more markets focused groups.

They're not as consumer facing as they were back in 2008. Their mortgage business is not nearly as substantial as Wells Fargo's. Again, that's not necessarily a story with the economic reopening. So that's something that's been in motion for over 10 years at Citigroup. JPMorgan Chase is not trying to do that strategy, not now, not in the last five years. Who knows? Probably they're not going to change that strategy under Jamie Dimon.

BRIAN CHEUNG: Are you doing the 11 o'clock show? You're doing a lot of work for [INAUDIBLE].

BRIAN CHEUNG: Yeah, yeah, yeah, you guys keep me pretty busy up here.

BRIAN SOZZI: All right, Brian Cheung, well, appreciate the analysis. Now, well, we'll see you soon.