Good bank quarterly profits in the US are not resulting in surging share prices, an indication of growing scepticism among investors about the strength of a key sector of the US economy at the start of the June quarter reporting season.
The overall health of the season is expected to be good, thanks to profit recoveries from the recessionary June quarter a year ago, but there are now rising doubts about how sustainable the earnings rebound will be.
Wells Fargo, Bank of America and Citigroup joined JPMorgan Chase and Goldman Sachs in smashing analysts estimates for June quarter earnings growth but weakish revenues, the favourable impact of reserves releases and lower interest rates muted the impact on share prices for the session on Wednesday.
It was a mirror of Tuesday when solid figures from JPMorgan and Goldman Sachs failed to boost shares of both giants and they ended lower.
Using a timely release of unused loan loss reserves from a year ago, Wells Fargo, Bank of America, Citigroup and JPMorgan Chase (which reported on Tuesday) posted a combined $US33 billion in profits – thanks to the release of $US9 billion in of 2020’s loan loss reserves.
That helped the big four banks boost earnings way past analyst estimated of around a combined $US24 billion, four times the $US6 billion reported by the quartet in the June, 2020 quarter.
But the cornucopia of cash in the quarter couldn’t disguise worrying revenue trends – weak lending and interest income figures (the weak interest income will continue for as long as interest rates remain low).
Wells Fargo, Citi and Bank of America reported on Wednesday.
Shares in Wells Fargo went against the trend, rising sharply (the only one of the big banks to do so). They were up 4% as the bank returned to profit and costs associated with its recent misselling and staff abuse scandals showed signs of stabilising.
Wells Fargo though remains under the cap ordered by the Federal Reserve in early 2018 as punishment for the misselling and staff abuse scandals. The Fed ordered Wells Fargo to keep its total assets below $US1.95 trillion, until it had improved its governance and risk controls.
The asset cap constrains Wells Fargo’s ability to make new loans and grow as rapidly as its rivals and while the bank has agitated to have the cap removed, management made it clear on Wednesday that it was not looking for any change at the moment.
Wells Fargo released $US1.6 billion in loan loss reserves from 2020 which boosted profit for the quarter to $US6 billion, compared with a net loss of $US3.85 billion a year ago.
Its results in the June, 2020 quarter were hit by $US9.5 billion in loan-loss reserves and a $US1.2 billion loss tied to the sales scandal, so the return of some of those reserves and the absence of a big provision for the scandal helped drive the shares up by nearly 4% in a best in field performance for the day.
Bank America shares fell before trading after the release of the results and continued to dip during the session, ending down 2.5% despite reporting revenues of $US21.6 billion and earnings of $US9.22 billion in the second quarter, up from $US3.53 billion a year earlier.
The result was better than forecast thanks in part to a $US2.2 billion reserves release.
But net interest income fell 6% which saw total revenues fall 4% from the June quarter of 2020 and triggered the weakness in the shares. Analysts concluded that the reserves release disguised weaknesses in the result.
Citi took a $US2.4 billion reserves release to boost earnings to $US6.19 billion, up from $US1.3 billion in the June, 2020 quarter.
Revenue for the quarter totalled $US17.4 billion – down a nasty 12% from more than $US19 billion a year earlier.
The shares fell 0.3% (they were down 3% in early trading).
Analysts said the reserve release boosted profits and helped offset a worrying fall in credit card lending and trading revenues.
After falling on Tuesday after the release of quarterly results, JPMorgan and Goldman Sachs both saw their shares weaken again on Wednesday. JPMorgan shares lost 0.3% and Goldman Sachs dropped 0.4%.
