Big US banks have gotten earnings season off to a bumpy start with a spate of reports that missed expectations and highlighted growing unease about the economy.
In the past two days, JPMorgan Chase & Co, Bank of America and Citigroup Inc all reported disappointing earnings, floundering on weak trading revenue and, in some cases, large legal expenses.
Wall Street reacted bitterly to the results, punishing not only the banking sector, but the broader market. The S&P 500 on Thursday closed below 2,000 for the first time in a month, falling for the fifth consecutive day.
The weak results from financial firms have quashed the momentum that pushed equity markets to record highs late last year.
“There was so much optimism after the fourth quarter that the worst was behind us,” FTN Financial chief economist Chris Low said.
“Nothing is worse for a stock than to think that you’re on an upward trajectory, only to discover that you’re not and to realize that there’s still risk,” Low said.
The banking results also gave Wall Street an occasion to fixate on gloomy macroeconomic conditions that could batter the sector. What would a wave of defaults in the oil sector mean for big banks? How would banks do if the US Federal Reserve does not raise US interest rates this year?
“There’s a growing sense of deflation risk, even in the US,” Low said.
Low said this week’s plunge in treasury yields is a sign the market believes the Fed will not raise rates this year.
Higher rates are a net positive for JPMorgan, the biggest US bank by assets, which reported a 6.6 percent decline in fourth-quarter earnings from a year ago to US$4.9 billion, missing expectations due mainly to an unexpectedly large US$990 million charge for legal expenses.
JPMorgan disclosed in November last year that it faced a criminal probe by the US Department of Justice over its foreign exchange trading business. The US$990 million charge is another indication that the bank’s foreign exchange regulatory woes are far from over, analysts said.
“Banks are under assault,” JPMorgan chief executive Jamie Dimon told reporters on a conference call.
Dimon and other executives parried questions on whether JPMorgan should be broken up in light of tougher regulations, including an order by the Fed demanding it raise an additional US$22 billion to shore up its capital buffer by 2019. Citigroup also faced questions about its legal exposure after a massive US$3.5 billion charge for legal costs and corporate position resulted in an 86 percent drop in earnings to US$350 million.
The big US bank, like its peers, suffered a large drop in trading revenue for its fixed income markets segment, which fell 15 percent to US$2 billion. Citi cited “difficult trading conditions in spread products, as well as a challenging macroeconomic environment that impacted the rates business.”
Citi chief executive Michael Corbat said decisions such as the surprise move by the Swiss central bank on Thursday to scrap its currency cap with the euro “causes people to move back from the market,” depressing volumes.
At Bank of America, quarterly earnings fell 11.3 percent to US$3.1 billion, missing expectations in part due to a fall in trading revenues.
Bank of America also faced concerns about its vulnerability to crashing oil prices. Chief financial officer Bruce Thompson estimated the bank’s exposure to oil at US$23 billion, with more than 80 percent of oil-related loans from investment-grade borrowers.
Bank of America officials conceded there could be some defaults from oil companies, but said debit and credit card spending this month had risen about 3 percent overall.
“There is a technical risk to the oil-producing companies,” chief executive Brian Moynihan said.
“We’re seeing the benefit to the consumer very starkly,” he added.
The major exception was Wells Fargo & Co, the country’s largest mortgage lender, which reported a 1.8 percent increase in earnings to US$5.7 billion, meeting expectations behind a solid 4 percent gain in average loans to US$849.4 billion.
Still, Marty Mosby, an analyst at Vining Sparks, said Wells Fargo results have “begun to stall,” with fourth-quarter earnings flat compared with the prior quarter.
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