Top U.S. banks are in the process of releasing first-quarter 2014 results, likely to reflect the tough backdrop endured by the sector since the beginning of the year.
The first to report earnings was Wells Fargo & Company (WFC - Analyst Report), which beat estimates by a decent margin. But numbers from JPMorgan Chase & Co. (JPM - Analyst Report) lagged behind estimates by a wide margin. However, Citigroup Inc. (C - Analyst Report) reported impressive first-quarter 2014 results, following Wells Fargo’s lead.
JPMorgan Chase failed to override industry conditions and delivered a negative earnings surprise of 9.2%. The banking giant came out with earnings of $1.28 per share, missing the Zacks Consensus Estimate of $1.41 by a wide margin. This is also significantly lower from the year-ago number of $1.59.
However, it would not be unjustified to blame industry-wide headwinds, as the company was largely unaffected by settlements of legal disputes. A lower level of consumer and corporate activities, soft trading volumes and sluggish mortgage banking dragged earnings this time around. Moreover, fundamental pressure from a low interest rate and sluggish loan growth made matters worse.
However, Wells Fargo earned $1.05 per share in first-quarter 2014, thereby achieving earnings growth for the 17th consecutive quarter. Results improved from $1.00 earned in the prior quarter and 92 cents in the year-ago quarter. The reported figure also beat the Zacks Consensus Estimate by 8 cents.
Despite negative market sentiment, shares of Wells Fargo increased marginally in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a fair idea whether Wells Fargo has been able to meet market expectations.
Following a disappointing second-half 2013, Citigroup reported impressive first-quarter 2014 results. Earnings per share came in at $1.30, outpacing the Zacks Consensus Estimate of $1.18. Moreover, earnings surpassed the prior-year period earnings by a penny.
Shares of Citigroup jumped around 3.7% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a better idea whether Citigroup has been able to meet expectations.
What Did They Get Right?
Both Wells Fargo and Citibank’s success was a result of prudent expense management. In Wells Fargo’s case total loans and deposits grew. Moreover, a strong capital position and returns on assets and equity acted as the positives. But more importantly, the company recorded reduction in non-interest expenses.
Wells Fargo also reported $500 million in reserve release (pre-tax), attributable to its improved credit performance. However, the company experienced a fall in its top line owing to lower non-interest income.
Better expense management was the driving force behind Citigroup’s better performance as well. Total costs of credit for the first quarter at Citigroup were down 20% year over year to $1.97 billion. The improvement was primarily attributable to a decline in net credit losses and reduced provision for benefits and claims.
The Bottom Line
Going forward, expense management may well be the key factor which determines a bank’s success and failure. Moreover, reserve releases for most banks are not expected to be strong enough to support bottom-line growth similar to the past year. Only continued expense control and stable balance sheets can make bank stocks desirable in the upcoming quarters.
Below we present two banking stocks which possess the potential to grow appreciably and are slated to report soon, each of which also has a good Zacks Rank and is poised to exceed estimates.
BNC Bancorp (BNCN - Snapshot Report) is the holding company for the Bank of North Carolina. A full service commercial bank, it offers a large number of banking services. It conducts both retail and business banking operations. Earlier this month, the bank completed a merger with South Street Financial Corp.
The company holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 30.40% for the next financial year. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 15.22. This stock has a positive earnings ESP of 8.33%
The First of Long Island Corporation
The First of Long Island Corporation (FLIC - Snapshot Report) is also a holding company for a bank. Its wholly owned subsidiary is The First National Bank of Long Island. Besides commercial and retail banking, it has an investment banking division and an insurance agency. Another subsidiary, FNY Service Corp, is an investment firm.
Currently the company holds a Zacks Rank #2 (Buy), and has expected earnings growth of 11.40% for the next financial year. It has a P/E (F1) of 15.43. The stock has a positive earnings ESP of 3.45%.
The banking environment remains fraught with challenges and yet some stocks have the ability to outperform the sector. These two choices have the ability to post good earnings numbers and would make excellent additions to your portfolios.
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