By Christina Rexrode, Peter Rudegeair and Emily Glazer
The three biggest U.S. banks posted fourth-quarter results that
buttressed investors' belief Donald Trump's victory and stronger
economic growth will reinvigorate the long-struggling financial
sector.
The performance of J.P. Morgan Chase & Co., Bank of America
Corp. and Wells Fargo & Co. was largely in line with what Wall
Street had been expecting: trading revenue was upbeat thanks to
increased market activity and volatility following the election;
expenses remain an area of intense focus; credit quality continues
to improve; and a recent upward move in interest rates should
produce gains in banks' income, even if it doesn't immediately flow
to the bottom line.
Investors viewed the results positively enough that they
continued to nudge the banks' stocks higher, even though they have
each already gained more than 20% since the election.
J.P. Morgan, the country's biggest bank by assets and the
world's largest by market value, was the standout. Its quarterly
profit of $1.71 a share handily outpaced analyst expectations,
largely due to strong trading results. Full-year 2016 net income of
$24.73 billion was a record.
Bank of America's earnings per share of 40 cents beat analyst
expectations as the bank cut enough expenses to offset
lower-than-expected revenue. At $17.91 billion, its 2016 net income
was its biggest annual profit in a decade.
Wells Fargo reported lower fourth-quarter earnings and revenue,
at 96 cents a share and $21.58 billion, that both missed analysts'
expectations. The bank's shares, though, rose after it repeatedly
referenced a charge related to interest-rate moves as the reason
for coming in below estimates.
Wells Fargo said its customer loyalty and satisfaction scores
were still down versus a year earlier as the bank struggles to
recover from its September sales-tactics scandal.
Going forward, the burden is on banks to live up to heightened
investor expectations while showing that increased profits are
sustainable. And while investors now believe a turn in the
interest-rate cycle is at hand, which would bolster bank profits,
rates remain super low by historical standards. That continues to
drag on results: Wells Fargo's quarterly return on equity hit its
lowest level in years at 10.94%.
Finance chief John Shrewsberry acknowledged that the market has
lifted bank valuations based on no more than current performance.
"Now banks need to, over some period of time, demonstrate how
they're going to earn into that," he said in an interview.
At Bank of America, CLSA analyst Mike Mayo asked officials for a
timeline on when they might meet goals on profitability measures
such as return on assets and equity. Bank of America's return on
equity in 2016 was just 6.71%, its highest level in five years but
still well below banks' theoretical cost of capital of 10%.
CFO Paul Donofrio replied to Mr. Mayo that the bank was moving
in the right direction but wouldn't set a time frame. "It seems
like, from an investor standpoint, you get a free pass," Mr. Mayo
said. "'When you get there is when you get there.'"
Speaking a week before Mr. Trump's inauguration, bank officials
offered vague support for tax reform and regulatory relief, but
didn't enumerate specific requests they might want from the new
administration. They also expressed optimism about the economy over
the coming year.
Among specific businesses, trading continued to gain ground.
After a brutal start in 2016, trading activity ramped up following
the U.K.'s vote to leave the European Union in June and accelerated
further after Mr. Trump's election. At J.P. Morgan and Bank of
America, annual trading revenue for 2016 increased above their
year-earlier levels for the first time in at least three years.
In the fourth quarter, J.P. Morgan's trading revenue rose 24%,
and Bank of America's rose 11%. Wells Fargo's relatively small
presence in trading has sometimes been an advantage in recent years
but has been a handicap of late.
Still, it isn't clear how long the trading jolt can continue.
Bank of America noted the postelection rise in long-term bond
yields had slowed demand for trading municipal bonds and other
products tied to interest rates.
Consumer banking was less buoyant: revenue was down at J.P.
Morgan and Wells Fargo versus the prior year, and flat at Bank of
America. Mortgage-banking revenue was also challenged due to the
rise in interest rates and looks set to continue falling this
year.
Reflecting a continued emphasis on cost control, executives held
the line on pay for traders and investment bankers. Compensation
expenses in J.P. Morgan's corporate and investment bank was 20% of
revenue in the fourth quarter, down from 27% in the third.
The cost-cutting drive continued in other parts of banks. Bank
of America's Mr. Moynihan has made expense savings a key part of
his business strategy, and the company cut annual expenses nearly
5% to $54.95 billion. Mr. Moynihan promised this summer to reduce
annual expenses to about $53 billion by 2018.
On the plus side, all three banks released reserves they had set
aside for loan losses, in part due to continued improvement in
credit quality. Such reserve releases bolster profit. As well, the
rebound in energy prices removed one of the biggest challenges to
bank profitability.
The Federal Reserve's December decision to raise interest rates
had little immediate impact on the banks' fourth-quarter results,
but made them hopeful about the coming year.
At Bank of America, officials said they expect an extra $600
million in net interest income in the first quarter, compared with
the bank's $10.3 billion in the fourth quarter. Bank of America is
particularly dependent on the Fed increasing interest rates because
of its large base of U.S. deposits and rate-sensitive mortgage
securities.
Write to Christina Rexrode at christina.rexrode@wsj.com, Peter
Rudegeair at Peter.Rudegeair@wsj.com and Emily Glazer at
emily.glazer@wsj.com
(END) Dow Jones Newswires
January 13, 2017 15:49 ET (20:49 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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