Second-Quarter Money Center Review

 | Aug 07, 2014 | 4:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:








With the second quarter bank call reports filed, it's time to review the financial condition of the money centers again: JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

The first quarter review is here.

The first issue to note is that of the four, the only one with a shrinking loan book and assets continues to be Bank of America. The value of all loans held by BofA has declined every quarter for the past four, and is decreasing at a rate of about 0.75% per quarter. The value of all loans at the end of Q2 was about $902 billion. In Q1, Q4 2013, and Q3 2013 it was $909 billion, $918 billion, and $926 billion respectively. This is made up almost entirely by the decline in the value of residential mortgages it holds, which has shrunk every quarter for the past 12 and declined by about $6 billion to $237 billion in Q2 from $243 billion in Q1. The total decline over the past three years has been about 20%. As it has struggled with its legacy issues of non-performing loans, it has not been able to compete with Wells Fargo, which surpassed BofA to become the largest mortgage lender in Q1 and increased that lead in Q2.

Wells Fargo added about $6 billion to its book of retained residential mortgages in Q2 and now has a balance of $250 billion. What's most interesting about the Wells total book of loans though is that it increased by $18 billion in Q2 from Q1, which means it is finally beginning to focus on broadening its business beyond mortgages. I've written in the past about how their almost singular concentration in that space represented risks to the company in the event that the housing and mortgage sectors suffered a set-back. The spike in rates last year that caused housing and mortgage origination activity to crater appears to have gotten management's attention.

On the negative side of that though is the fact that the largest increase in lending came from commercial and industrial loans (C&I), which was even larger than the increase in their mortgage book at $7 billion for Q2 from Q1. As I've written before, C&I loans have become since the 2008 financial crisis a preferred way for banks to book loans, but they are not producing a benefit to the economy commensurate with their growth. (I will address the ramifications of the increase in C&I loans separately next week.)

JP Morgan continues to have the broadest and most balanced loan book, with increases in the value of the loans in every sector except second trust residential mortgages and lease financing receivables. Its total loan book increased by $16 billion to $744 billion in Q2 from $728 billion in Q1. JP Morgan also dominates by way of total assets, with Q2 increasing by $35 billion to $2.138 trillion from $2.103 trillion in Q1. To put that in context, the total value of assets at Bank of America, Wells Fargo and Citigroup respectively is about $1.6 trillion, $1.5 trillion, and $1.4 trillion. JPM is now 33% larger than BAC and 52% larger than its primary US competitor, Citigroup. It is becoming what can best be described as a super money center and increasingly distinct from the other three.

Citigroup's loan book advanced by about $7 billion in Q2, but as is the case with JPM and Wells, a large percentage of that, about half in Citi's case, came from C&I loans.

The most notable factor concerning the Citi's call report was the massive increase in the value of recoveries on defaulted loans, which increased to 47% in Q2 from 2% in Q1. Citi's recovery rate has been trending between 1% and 2% for the past three years, so this is a bit of a shock even as it is clearly good news and signals that legacy issues from the 2008 financial crisis are being fully resolved.

The same pattern is evident at JP Morgan and Bank of America. JPM's recovery rate has been in the 100% range for the past year and that continued in Q2. To put that in context, it was 3% just two years ago.

Bank of America's recovery rate surged to 112% in Q2 from 38% in Q1 and it also was about 3% two years ago. This is excellent news for the banking sector and signals that demand for physical collateral, houses, by cash buyers is increasing.

Wells Fargo also experienced an increase, albeit not as large as the others. Its recovery rate increased to about 38% in Q2 from 28% in Q1. More importantly and positively, however, is the fact that the value of non-performing loans finally began to decrease, falling about 10% to $27 billion from $30 billion.   

Columnist Conversations

volatility is quite low here, and we could see some downsides here in the short term. ...
View Chart »  View in New Window »
this chart is showing great bullish signs here, we like this to take out the old high shortly. ...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.