JPMorgan optimism outplays Wells Fargo one off gain

The first set of fourth-quarter reports from giant U.S. banks showed patchy performances continued into year-end. Still, JPMorgan remained on track for modestly faster growth and Wells Fargo’s retrenchment continued to grind.

As expected, JPMorgan shares outshone those of Wells, despite divergent early encounters with the new U.S. corporate system. Wall Street made up its mind early about JPM’s headline miss and Wells’ first robust reported result for several quarters. Fourth quarter earnings quality was obviously questionable for Wells, with income flattered by a one-off $3.35B tax gain accounting for almost half its $6.2B net income, or $1.16 a share. It also saw an $848m pre-tax boost from selling a U.S. insurance business, worth 11 cents a share.

At the same time, Wells’ closely eyed expenses ratio remains obdurately above the 60 cents per dollar of revenue level that management has long spotlighted for improvement. The unadjusted ratio spiked to 76.2% in Q4 due to a one-off pre-tax charge for litigation costs, though the bank was confident enough of progress to reduce its efficiency goal to 59% for the end of 2018.

The group’s top spot in residential loans also continues to be closely watched for signs of erosion as rivals continue concerted efforts to grow in consumer lending. The closest, JPM’s had market share in home mortgages some 10 percentage points below Wells in 2017, but there was evidence it is catching up. Wells Fargo originations slumped 33% last year.

The generally downbeat tone of the bank’s commentary encapsulated a view that progress out of reputational and financial doldrums remained sluggish.

As per much of 2017, the contrast with JPMorgan was tangible. Investors didn’t hesitate to send shares in the largest U.S. bank by assets to their first record high of the New Year. Excluding major items JPMorgan would have posted EPS of $1.76, comfortably above prevailing expectation of $1.69 for Q4. This made the irony of JPM’s $2.4bn tax hit from the same source as Wells Fargo’s one-off boost easy to shrug off, lifting JPM’s shares soon after Wall Street opened.  Optimistic commentary seemed to help. The bank suggested revamped taxation would boost profit growth from increased revenue generation and not just from its tax rate falling to 19% from 32%.

There were also signs that the JPMorgan’s trading businesses have passed the most fallow conditions seen over the last few quarters. Equity market revenues was up 12% adjusted for a mark-to-market loss, and a 34% decline in bond trading was little surprise given exposure to current sea changes in Treasury prices.

JPM’s net interest income continued to ascend helping bring an eighth consecutive EPS beat. A forecast that much of the year’s revenue boost will “fall to the bottom line” bolsters hopes of modestly accelerated growth in 2018.