The early take on financials for this earnings season is generally as good as or modestly better than expected.
Loan volumes and credit quality continue to improve. In particular, credit quality is approaching record low levels with further reserve releases boosting earnings. Managements also continued aggressive cost cutting and productivity programs during the quarter, which aided earnings and profitability levels.
Offsetting these positive trends was declining mortgage origination levels. Mortgage activity for banks was off over 25% for the quarter. The recent spike in interest rates during the previous three months led to a significant reduction in mortgage re-financings. The mortgage purchase market was also slower.
For the capital markets-related banks, rising interest rates impacted fixed income trading in the quarter, with major Wall Street-related banks reporting double-digit declines in trading activity.
During the quarter, financial institutions also were affected by rising legal and regulatory related issues. Most of the major financial institutions boosted their legal reserves in the quarter as related to government investigations and fines for past banking practices.
In particular, JP Morgan (JPM) boosted its legal reserves in the quarter by $9 billion, leading to its first quarterly loss under CEO Jamie Dimon. While a massive number, the likely $13 billion deal with regulators that was reported this weekend should ultimately remove a significant overhang from the company and the stock.
Leaving aside these legal and regulatory actions, which most expect to be transitory, financial institutions generally met, or beat, earnings estimates. The numbers have been good and getting better. Apart from reserve charges, JPM actually beat its earnings expectations by a significant amount, thanks to strong investment banking operations, rising loan growth, stellar credit quality and restrained expense growth.
Wells Fargo (WFC), a major institution which was under significant mortgage activity pressure, also reported better-than-expected earnings, led by improving loan growth, stellar credit quality and restrained expense growth.
Credit card-oriented banks also did well during the quarter. American Express (AXP) beat earnings by several cents on strong global card spending. Card billing during the quarter actually accelerated to 9% from 8% quarter over quarter. Net interest income also improved with wider financial spreads. As with the rest of the financial industry, AXP reported record low credit losses.
Capital One Financial (COF), another leading credit card player, also reported better than expected earnings during the quarter lead by stable net interest margins, record low credit losses and strong expense controls.
Some of the regional banks also reported. To date, most of the regional banks earnings have been in line. US Bancorp (USB) reported in line metrics led by 2% loan growth offset by declining mortgage originations. BB&T (BBT) reported numbers slightly below estimates due to weak mortgage volumes and elevated investment spending trends in the nearer term. Fortunately, the overall BBT franchise is still healthy and expects to see a continued rebound in business and earnings in 2014.
Overall, financial institutions continue to report improving trends led by rising loan growth, falling credit costs and restrained expense growth. In 2014 we should see a continuation of these trends, with rising returns of capital due to the improved earnings levels, healthy balance sheets and government blessings of capital returns.
Even with the great run they had since mid-2012, we continue to be bullish on financials.