First Quarter Money Center Review

 | May 08, 2014 | 3:00 PM EDT
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Over the past few years I've been reviewing the quarterly bank reports with a focus on the money centers: JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

I'll review the status of them for the first quarter 2014. The fourth quarter 2013 review can be found here.

Wells Fargo became the largest mortgage lender in the first quarter, replacing Bank of America, as its book of residential mortgages grew while BAC's continued to shrink. This trend of growth at Wells and contraction at Bank of America has been in force since the financial crisis erupted, so it's no surprise that Wells finally took the lead by a slim margin, having $244 billion vs. $243 billion at BAC.

Wells Fargo was also the only one of the 4 money centers to post an increase in total loans held in the first quarter, increasing by 0.2%, or $1.655 billion, to $818,500 billion.

By comparison BAC's loan book declined by about 1% to $10 billion, JPM's declined by 1% to $7 billion and Citi's was statistically unchanged, declining by about $130 million.   

But Wells has issues of which investors need to be aware. Of its total loan growth, 90% came from residential mortgages. The rest came from auto loans. There was almost no change in the rest of the loan sectors reported, which are broken down in two broad categories, commercial and individual loans.

The commercial loans are subdivided as Commercial and Industrial (C&I), Commercial Real Estate, Construction and Development, Multifamily Residential Real Estate, Lease Financing Receivables, Farm, and Farmland. The individual loans are 1-4 Family Dwelling First Liens, 1-4 Family Junior Liens, Home Equity, Auto Loans, Credit Cards and Other.

This should be disturbing for investors as it indicates that management may not have the ability to maximize the potential of the non-mortgage-related groups they acquired through the acquisition of Wachovia during the financial crisis. Spinning these groups off may be in order.

Bank of America's report showed even bigger problems and a shift in the banks focus. BAC used to be the dominant mortgage lender, but no more. As Wells Fargo has advanced in that space and BAC continues to grapple with legacy issues there, the company has had to reinvent itself by expanding in the markets it hasn't focused on for several years and contracting in the markets that have been its dominant business.

Loans held in all of its largest segments declined. Residential mortgages, C&I, commercial real estate, credit cards, autos and home equity. The only notable increase came in Lease Financing Receivables. This is an area that all of the money centers had largely exited over the past 10 years and clearly indicates an opportunity for BAC. It also showed minor increases in construction and development, farms, and farmland.

The company is also making tremendous strides in reducing its portfolio of nonperforming loans. In the first quarter alone, the number dropped by another 9% to about $31 billion from about $34 billion. In the past year-and-a- half the decline has been about 50%.

JPMorgan's total loan book decline was almost exclusively because of a decline in credit cards, which declined by about $6 billion to $111 billion from $117 billion. The other money centers showed declines here, too, which traditionally happens in the first quarter. But it was the largest at JPM.

JPM continued to advance in the residential mortgage space, adding another $1 billion, and was the only money center other than Wells Fargo to show an increase there. Although JPM's residential mortgage book is only about half the size of Wells Fargo's at $134 billion vs. $244 billion, residential mortgages are only about 18% of JPM's total loans vs. 30% at WFC.

The battle for control of the mortgage market is shifting increasingly to JPM vs. WFC from what used to BAC vs. WFC.

Citigroup was the only money center to increase its holdings of C&I loans in the first quarter, increasing by about $5 billion to $143 from $138 billion. Citi is the only money center in which C&I loans are the largest percentage of total loans held. At the other three, one-to-four family residential mortgages are the largest holding. There were no other notable changes at Citi.

For the most part, the earnings reports for the money centers are in line with the banking system overall, as I related yesterday, and show a pattern of slow growth in Q1 with distinct and, in some cases, shifting business priorities at each of them.     

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