Warren Buffett’s two favourite banks helped kick off the US third quarter reporting season on Friday, producing contrasting results for the three months to September, which in turn received the appropriate stockmarket receptions.
The two reports from Bank of America (BAM) and Wells Fargo followed results from JPMorgan Chase and Citigroup the day before which were just as mixed.
Warren Buffett’s Berkshire Hathaway is now the largest shareholder in Bank of America and Wells Fargo & Co.In their third-quarter earnings on Friday, BAM registered some gains, while Wells Fargo’s results were weak and hit by the huge costs of its multiple run-ins with regulators and associated costs.
BAM ignored industry-wide weakness in bond/currency and commodity trading to generate its highest return on equity in six years. Wells however produced its weakest return in seven years, even though it has had limited exposure to Wall Street trading.
Wells’ return on equity (ROE) was 9.06%, the first time since 2010 the measure has fallen beneath 10%, While BAM’s ROE rose from 7.3% a year ago to 8.1%, it remains below its cost of capital. Both figures compare poorly to the 13% plus for Australia’s big banks
Wells Fargo posted mixed earnings, reporting earnings that topped Wall Street expectations but revenue fell short. Revenue was $US21.93 billion, missing analysts’ forecast for $US22.4 billion.
Wells Fargo reported a profit of $US4.57 billion, which included a charge of $US1 billion, for previously disclosed mortgage-related regulatory investigations. That compared with $US5.64 billion a year ago.
Bank of America reported revenue of $US22.08 billion, topping analysts’ expectations for sales of $US21.98 billion. The bank said its bond trading revenue fell 22% during the quarter to $US2.15 billion, down from $US2.65 billion a year ago.
Bank of America Corp said its third-quarter profit rose to $US5.59 billion, despite those trading headwinds. Quarterly profit was up 13% from the $US4.96 billion earned a year earlier.
Bank of America shares rose 1.3% to $US25.83, Wells Fargo shares fell 2.75% to $US53.69. That saw Bank of America valued at $US272.5 billion and Wells Fargo, at $US266.5 billion. Berkshire’s 700 million BAM shares are worth just over $US18 billion and the Wells Fargo stake (just under 10%), is worth around $US26 billion.
Bank of America shares are up 16% this year, Wells shares are down 80 cents (as at Friday) from their start in January. The KBW bank index is up around 8% in the same time.
Meanwhile the September quarter profit reporting season accelerates this week with two more banks, a smattering of techs and industrials and some media. Nearly 60 companies listed on the S&P 500 are expected to report results this week.
They include: Goldman Sachs (Buffett owns more than $US2.6 billion worth of shares) and Morgan Stanley round off bank results but the list also includes quarterly updates from Netflix, CSX, United Airlines, IBM (another Buffett favourite), Alcoa, United Health, eBay, Nucor, PPG Industries, P&G, Schlumberger, Verizon, Baker Hughes GE, Whirlpool, Dish, PayPal, Unilever and General Electric among others.
