Bank earnings match expectations but fail to light a fire under stocks

The third-quarter earnings season kicked off as expected on Friday, with three of the nation’s biggest banks delivering reports that initially impressed, but lost some of their shine as the trading session progressed.

That’s a pattern that has frustrated bank stock investors this year, as strong numbers have repeatedly failed to boost stock prices. The Financial Select Sector SDPR Fund XLF, +0.11%  has fallen 5.4% in 2018 to date, while the Invesco KBW Bank ETF KBWB, -0.88%  has fallen 5.9%. That compares with the S&P 500’s SPX, +1.42%  3% gain in the period, and the Dow Jones Industrial Average’s DJIA, +1.15%  1.9% gain.

JPMorgan Chase & Co. Chief Financial Officer Marianne Lake attempted to explain the disconnect between bank earnings and their stock price movement on the company’s earnings call, noting the “macro uncertainty noise” and overhang that has battered the markets in the last few days.

“Overthinking any one driver or conclusion might be challenging,” she told analysts, according to a FactSet transcript. “As we look at the economy, we don’t see it slowing down. It seems to be continuing to grow pretty solidly.”

JPMorgan is expecting the global economy to start to converge with the U.S. going forward, she said. Meanwhile, the U.S. is lining up for a December rate hike and more hikes in 2019, which means the continuation of a steeper yield curve—”and that should all be constructive for bank stocks,” she said.

Mark Doctoroff, global co-head of Financial Institutions Group at MUFG, agreed, and said bank stocks have been viewed harshly by investors since the financial crisis.

“But we’re in a really good environment,” he said. “The consumer is healthy, corporate credit is healthy, there are little to no credit losses. There has been talk about slow loan growth, but that’s not the banks’ fault. It’s the evolution of the market that a lot of nonbank lenders are now taking share, from BDCs to private-equity to even asset managers. Overall, there is loan growth, it’s just not only at banks.”

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Macro issues are also causing some unease, Doctoroff said, although those, too, are looking overdone.

“The trade discussions and renegotiation of deals have raised uncertainty about what it means for midsize and smaller businesses,” he said. “Those are not having a huge impact now, but they could.

“There’s uncertainty about oil prices, about emerging markets and currency moves. But the reality is the U.S. banks are generating more capital than ever and are winning market share in Europe, where things like Brexit are playing into their hands.”

JPMorgan Chase & Co. JPM, -1.09% beat analyst estimates, posting a 24% rise in profit as strength at its consumer business helped offset a weak trading result that had been flagged during the quarter by Chief Financial Officer Marianne Lake.

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The bank reported net income of $ 8.38 billion, or $ 2.34 a share, in the quarter, up from $ 6.73 billion, or $ 1.76 a share, in the year-earlier period. Revenue rose to $ 27.8 billion from $ 26.5 billion. The FactSet consensus was for EPS of $ 2.26 and revenue of $ 27.4 million.

Net interest income rose 75 to $ 14.1 billion, mostly due to higher rates. Noninterest income rose 3% to $ 13.8 billion, driven by higher market noninterest revenue and auto lease income, offset by markdowns on legacy private-equity investments.

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Noninterest costs rose 7% to $ 15.6 billion, as the bank invested in business, technology, marketing and real estate. Provisions for loans that may sour came down to $ 948 million from $ 1.5 billion, driven mostly by the consumer portfolio.

The company made $ 22.5 billion in mortgage loans in the quarter, down from $ 26.9 billion a year ago.

The retail bank business had net income of $ 4.09 billion, up from $ 2.55 billion a year ago. The corporate and investment bank had net income of $ 2.626 billion, up from $ 2.546 billion a year ago. The commercial bank business had net income of $ 1.089 billion, up from $ 881 million, and the asset and wealth management business had net income of $ 724 million, up from $ 674 million.

At Citigroup Inc. C, +2.14% net income rose 12% to $ 4.62 billion, or $ 1.73 a share, from $ 4.13 billion, or $ 1.42 a share, in the same period a year ago. Revenue was flat at $ 18.4 billion. The FactSet consensus was for EPS of $ 1.68 and revenue of $ 18.5 billion.

Trading revenue rose 7% to $ 3.99 billion, led by a 9% gain in fixed income trading. But investment-banking revenue fell 8% to $ 1.18 billion, due to lower equity and debt issuance.

Institutional client revenue was off 2% from a year-ago, partly due to a large gain on the sale of a fixed-income data business in the year-earlier period. Treasury and trade solutions rose 4%.

Revenue at the bank’s global retail bank rose 2%, boosted by a 20% gain in Mexico, after the sale of an asset-management unit. North American retail banking revenue fell 1%. Card revenue fell 3% to $ 2.2 billion.

The bank’s loan book grew 3% to $ 675 billion in the quarter. Deposits rose 4% to $ 1.0 trillion.

At Wells Fargo WFC, +1.30% net income rose to $ 6.0 billion, or $ 1.13 a share, from $ 4.5 billion, or 83 cents a share, in the year-earlier period. Revenue rose to $ 21.9 billion from $ 21.8 billion. The FactSet consensus was for EPS of $ 1.19 and revenue of $ 21.8 billion.

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Net interest income rose to $ 12.6 billion from $ 12.4 billion while noninterest income rose by $ 357 million to $ 9.4 billion. The bank’s deposits fell 3% to $ 1.3 trillion, while loans fell 1% to $ 939.5 billion.

Mortgage banking income rose to $ 846 million, up $ 76 million from a year ago.

JPMorgan shares were down 1.7% in early afternoon trade. Citi was up 0.6% and Wells Fargo was down 0.1%.

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