Two of the biggest U.S. banks -- J.P. Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) -- took advantage of diverse global economic trends to post comfortable first quarter earnings beats of Wall Street's expectations and reverse momentum from a disappointing fourth quarter.
The solid performances by the two banking giants were widely expected given the economic turbulence abroad, especially in Europe, which lifted J.P. Morgan's stock and bond trading revenue, and expectations that historically low interest rates might be moving higher soon, which benefitted Wells Fargo's mortgage business.
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But analysts cautioned that the banking sector could be an anomaly this earnings season precisely because of those diverse global economic trends. The rest of the financial landscape is expected to be clouded by a surging dollar and falling oil prices.
"The impact of lower oil prices and a high dollar may be less pronounced on the numbers due out this week than in the weeks ahead," said David Kelly, chief global strategist at J.P. Morgan Funds, before the results were announced. "However, investors should not be lulled into complacency by better-than-expected numbers this week or by the idea that the bar for the earnings season overall has already been set low enough. Analysts have slashed their first quarter estimates but their numbers for the rest of the year still look a little high in the absence of a dollar slump or an oil rally."
Bank earnings suffered overall in the fourth quarter of 2014. Citigroup (NYSE: C), Bank of America (NYSE: BAC), and J.P. Morgan Chase all missed Wall Street’s expectations, while Wells Fargo’s results were in-line with estimates but hardly impressive. An unusually calm second half of the year eased volatility in securities markets, which cut into trading volume and slashed the big banks' trading revenues.
Things were livelier in the first quarter as Greece threatened European economic stability again and the European Central Bank initiated a bond purchasing program similar to the stimulus programs employed by the U.S. Federal Reserve in the wake of the 2008 financial crisis. Add to that the Swiss central bank’s decision to abandon its currency cap against the euro earlier in the year, an unexpected move that briefly threw foreign exchange markets into a tizzy.
New York-based J.P. Morgan, the largest U.S. bank by assets, was a beneficiary of that overseas turbulence. Net income rose to $5.91 billion, or $1.45 a share, from $5.27 billion, or $1.28, a year ago, according to a statement released with the bank's earnings report. Analysts had forecast earnings of $1.40 per share. Excluding 13 cents in legal expenses and about 3 cents in accounting adjustments, earnings were $1.61 a share. Revenue came in at $24.8 billion, also beating expectations for revenue of $24.5 billion.
J.P. Morgan's shares were up nearly 2% in early trading Tuesday.
"We made very good progress during the first quarter," said J.P. Morgan's Chief Financial Officer Marianne Lake during a conference call with analysts.
Profit in J.P. Morgan's investment banking division rose 19% to $2.54 billion, the largest increase within the bank’s four main businesses. "Macro events" were cited by the banks as serving as a catalyst for increasing client activity in currencies, emerging markets, rates and equities. Fixed-income trading revenue rose 4.5% to $4.07 billion, while equity-trading revenue jumped 22% to $1.61 billion. San Francisco-based Wells Fargo, whose business is focused more on consumer and business lending than investment banking, benefitted by a surge in mortgage applications but was hurt at the same time by lower lending margins, both the result of the Fed's reluctance to raise interest rates above the near-zero level where they've been held for over six years.
Wells Fargo's shares were down 1.7% at 11 a.m. EST.
Wells Fargo said in a statement that first-quarter lending margins fell below 3% for the first time since the 1990s. Net income fell 1.5% to $5.8 billion, or $1.04 a share, from $5.89 billion, or $1.05, versus the same period a year ago. But the results still beat analysts' estimates of 98 cents. Revenue came in at $21.3 billion, also topping Wall Street's expectations of $21.2 billion.
Wells Fargo and other big mortgage lenders are expected to see a rush on mortgage applications through the first half of 2015 as borrowers fearing that rates will be moving higher later in 2015 take advantage of low interest rates while they last. That dynamic certainly played out in the first quarter.