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A Tale of Two Banks

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Friday, April 11, 2014

Stocks today will likely continue the negative momentum from the Thursday sell-off, with the strong Wells Fargo (WFC - Free Report) report unlikely to offset the sour mood created by the big J.P. Morgan (JPM - Free Report) miss. With the 2014 Q1 earnings season getting into high gear next week -- with 57 S&P 500 members reporting results -- the uncertain corporate earnings picture may finally be catching up with this market.  

There wasn’t much surprise in the banks’ mortgage banking woes, with revenues in the business down 76% for J.P. Morgan from the same period last year. J.P. Morgan isn’t expecting to make any money from its mortgage banking operations this year. Wells Fargo was no better, with mortgage originations down -67% from the same period last year, though a bigger part of their mortgage portfolio funds home purchases that is holding up better relative to the refinancing business.

The key difference between these two banking leaders is their capital markets exposure – J.P. Morgan is a big capital markets player, while Wells isn’t much of one. The capital markets weakness was very pronounced for J.P. Morgan, with revenue in the business down 17% year over year, on persistent weakness on the fixed income side. J.P. Morgan’s weak capital markets results have negative read-throughs for Goldman Sachs (GS - Free Report) and Bank of America (BAC - Free Report) , who report next week and have big fixed income franchises.

On the positive side, business banking loans were up in the quarter for both banks, though Wells Fargo showed more momentum on that front.  J.P. Morgan and Wells Fargo’s business loan results are in-line with what we have been seeing from Federal Reserve data as well that show growth in commercial & industrial and commercial real-estate loans in March after a slow start to the year. The consensus view is pinning hopes on material gains under these categories in the coming quarters, with the consumer side only slowly picking up.

After many quarters of strong growth, bank earnings are expected to be down in Q1, as they are for the broader S&P 500 as a whole. Total Finance sector earnings are expected to be down -8.7% from the same period last year, with earnings for the banking industry (the largest in the sector) expected to be down -17.1%.

The market may not have been looking for much earnings momentum in Q1, but hopes for the coming quarters remain high, with growth expected to ramp up in the back half of the year. Beyond Finance, expectations for the broader S&P 500 index are no different, with the Q1 earnings decline followed by positive growth in Q2 and a material ramp up in the second half of the year that then continues into 2015.

Nothing new in this earnings outlook. Consensus expectations have been hoping for an earnings-growth ramp-up in the outer quarters for almost two years, but they wouldn’t get overly disappointed when growth doesn’t show up. And we know that the market covered quite some ground over the last two years.

Hard to tell whether the ongoing sell-off is the market’s way of finally coming to grips with this underwhelming earnings outlook or just a minor hiccup on the way to even higher levels. We will find out soon enough, but stocks don’t typically keeping moving up while estimates are coming down, as has been the case for almost two years now.

Sheraz Mian
Director of Research

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