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Bank earnings beat -but with a catch

Friday, April 12, 2013 - 02:43

April 12 - J.P. Morgan and Wells Fargo both posted higher profits but shares of the companies and other banks fell on concerns about falling revenue. Bobbi Rebell reports.

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The earnings numbers look good on the surface for J.P. Morgan and for Wells Fargo- but for many on Wall Street- they don't add up to a winning quarter. JP Morgan, the largest U.S. bank, reported a sharp rise in first quarter profits, to a record $6.5 billion. But many analysts, like S&P Capital IQ's Erik Oja, took issue with where the profits came from: SOUNDBITE: ERIK OJA, EQUITY ANALYST, S&P CAPITAL IQ (ENGLISH) SAYING: "J.P. Morgan Chase results were better than expected, but it was really focused on one business area which was capital markets, trading, fixed income and equities. And some of the other businesses, the bread and butter lending businesses were down slightly so it looks like there is some more volatility in earnings, Because capital markets are much more subject to global macro risks. " J.P. Morgan also lowered expenses, and didn't have to put aside much money for litigation tied to mortgages or the London whale scandal- in fact that group generated a profit. But consumer banking plunged 12 percent, and its home lending business is becoming less profitable because of increased competition as the housing market heats up. Profits at rival Wells Fargo jumped 23 percent. But the top U.S. home lender saw weakness in its mortgage business. SOUNDBITE: ERIK OJA, EQUITY ANALYST, S&P CAPITAL IQ (ENGLISH) SAYING: "They are one of the best positioned to benefit from the housing recovery that we are seeing. However, the first quarter was largely a disappointment and why? Because earnings were driven mainly by expense reductions. The loan portfolio's total loans were flat with 4th quarter, about $800 billion and the mortgage pipeline for origination's and refinancings fell yet again from the 4th quarter." Shares of both J.P. Morgan and Wells Fargo fell on Friday, while other banks including Goldman Sachs and Citigroup were little changed- as the market braces for similar report cards. Fitch Ratings Christopher Wolfe: SOUNDBITE: CHRISTOPHER WOLFE, MANAGING DIRECTOR AND HEAD OF US BANK COVERAGE, FITCH RATINGS (ENGLISH) SAYING: "We do think that margin compression will be a common theme amongst most of the banks. And so you saw that with Wells and JPM, and we do think that we will see that more broadly across the industry given the low rate environment. So margin compression is probably one key area that we will be taking a look at. We'll also be looking to see how others are doing on credit quality and asset quality and just the pace of improvement that many are experiencing and we will also be looking at how banks are bringing down expenses." Also looming: new regulations that could force the banks to cut back on their often lucrative proprietary trading and investments.

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Bank earnings beat -but with a catch

Friday, April 12, 2013 - 02:43