Big U.S. banks face big let-down quarter

<p>Big U.S. lenders are set to report lacklustre results this week. That could press the brakes further on their shares after the evaporating ‘Trumpflation’ rally left all but one (Bank of America) trading in the red for the year.</p>

And like that, it was gone.

That’s the concern that’s emerged among big U.S. bank in recent weeks. The sentiment is capping a frustratingly disappointing quarter for lenders in which a deceleration of their stocks and a relapse by some into regulatory troubles has coincided with signs that a new era of lighter-touch regulation amid improving loan rates is not quite around the corner after all.

Instead, big U.S. lenders are set to report more lacklustre results this week. That could press the brakes further on their shares after the evaporating ‘Trumpflation’ rally left all but one (Bank of America) trading in the red for the year.

A recent slowdown in loan growth has re-emerged as a major concern. It’s an ironic side effect of this year’s uptick in interest rates—linked to the rise in Federal funds rates that big banks had wanted for years—dissuading consumers and companies from refinancing loans.


Loans drop like stones

In February, loan growth at U.S. banks actually fell for the first time in more than three years, according to Federal Reserve data, and was down for the first quarter overall.

The lending slowdown is a surprise, and there are signs that it’s linked to softening mortgage refinancing and corporate borrowing as well as uncertainty about U.S. policy and economic growth.

That may suggest a potential positive takeaway could be possible in the year ahead given that most U.S. economic data suggest progress has been on an unmistakeably improving path and is unlikely to dramatically reverse in the near-to-medium term.

The Fed lifted its benchmark interest rate by 25 basis points in March, the second hike in three months. The problem is that climbing short-term rates have come almost simultaneously with a fall in longer-term rates, bringing the two closer together.

This is the essential definition of yield flattening and it is exactly what banks do not need, as it certainly erodes much of the expected benefit from higher Fed fund rate.

Big earnings let-down by the Big 4

For that reason, when three of the biggest U.S. lenders, JPMorgan Chase & Co, Citigroup Inc. and Wells Fargo & Co, report first-quarter results on Thursday, they’re likely to disappoint recent expectations.

Earnings expectations for rivals Bank of America Corp, Goldman Sachs Group Inc. and Morgan Stanley, which will report next week, have also been revised lower of late, and could even fall further depending on quarterly income performance of the raft of lenders disclosing earnings on Thursday.

For the six biggest U.S. banks, institutional investors are forecasting an average net income increase of 4.7% year on year, according to Reuters data.

That is not in fact as solid an advance as it sounds. As little as a week ago S&P 500 banks as a whole were forecast to post results showing profits in their most recent quarters up well over 10% year-on-year. Additionally, the same quarter a year ago was beset by sharp declines in capital markets activity and poor loan growth. There were also macroeconomic concerns centred on the UK ahead of the Brexit vote. Under these circumstances, an ‘easier’ comparable performance would normally make for more than modest growth a year forward, but that mostly hasn’t happened.


Sins of commissions

This time around, weaker-than-expected commissions are expected as new regulations in Europe are phased in and amid dwindling returns from active asset management, as the business model looks increasingly to be in long-term decline. This will largely offset improving bond trading and wealth management revenues.

Fewer deals in the first quarter also imply lower revenues from M&A banking, though there is at least a seasonal aspect to the dearth of corporate deals that’s quite typical at the start of the year.

All in all, the quarter looks set to represent another delay before a decisive turnaround is seen in big U.S. banks which have been struggling to earn decent returns on shareholder equity many years after they dragged themselves up from the floor following the financial crisis.

It does appear however, that for most of the large U.S. banks, a several years-long phase of spending billions of dollars to settle legal claims and comply with new regulations and capital requirements whilst undertaking massive cost-cutting programs and revenue-boosting initiatives, is largely over. There is, however, no guarantee that conduct issues, new and old, won’t rear up to bite.

This week, Wells Fargo, the U.S. No.3 bank in terms of assets, blamed a former highly ranked sales person for one of the most notorious scandals involving a U.S. financial services firm for several years. A report by Wells’ chairman and three independent directors said the former retail division head ignored systemic abusive sales practices and accused her of impeding the board’s efforts to address an issue that festered for years. Lawyers for the banker, once praised by former WFC CEO John Stumpf, as the “best banker in America”, denied the accusations. Stumpf and the sales person left the bank within a year of the issue coming to a head.


JPM fees flattered by reprieve

Wells Fargo is forecast to report a net interest margin of 2.9%, flat on the first quarter (Q1) of 2016 and also unchanged against Q4 2016. Total revenues are seen rising a fraction to $22.22bn, and total income up 0.8% at $22.37bn. Fees and commissions are forecast up 6.3% to $9.07bn, with net interest income rising 7% to $12.5bn.

At JPMorgan, fees and commissions will be flattered by the basis effect from very weak quarters in 2016, when this income line had yet to bottom from a downturn that was at its depths the year before. The bank is expected to report a 94% rise in fees and commissions for Q1 to $13.2bn, which will contribute to a 16% rise in net income to $5.93bn, on revenues up 3% to $24.81bn.

Citigroup revenues are expected to rise 1.1% to $17.74bn, though it might well report the worst fees and commissions amongst its peers if forecasts of a 20% slide to $2.6bn prove accurate. Again, Citi may have borne the brunt of the loan business slippage amongst its peers in Q1. Its loan book is seen slumping 58% to $630bn.


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