Bank earnings: Mortgages and FICC cast gloom over US banks
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Bank earnings: Mortgages and FICC cast gloom over US banks

Morgan Stanley fares better; Mortgages down but reserves freed up

US bank earnings for the third quarter came in below expectations, with FICC and home loans dragging financials down. According to analytics firm Factset, companies in the financials sector reported the largest downside aggregate differences between actual earnings and estimated earnings. That was largely driven by JPMorgan’s surprise legal expenses, which resulted in a loss per share of $0.17 for the third quarter, far below the mean EPS estimate of $1.19.

Bright spots for the universal banks were in brokerage divisions and investment management and in indications of a drop in loan reserves.

Morgan Stanley was the light in the storm this quarter, beating analyst forecasts. Its third-quarter revenue jumped 50% and it reported net income of $888 million. That compared with a loss of $1 billion a year earlier. Bank of America’s earnings were up slightly on the third quarter of last year and its quarterly profit came in at $2.5 billion. Wells Fargo’s profits also increased, to a record $5.6 billion. JPMorgan posted a $0.4 billion loss as a result of its $9.2 billion legal expense. Citigroup reported net income of $3.2 billion, up from $468 million last year, missing estimates, while revenues dropped 5%. Profits at Goldman Sachs were flat at $1.5 billion, but revenues were lower than estimates. Net revenue declined by 20% year on year to $6.72 billion.

Brokerage and wealth management helped to bolster earnings at some of the banks, particularly Morgan Stanley, whose Smith Barney acquisition looks to be finally paying off. Third-quarter profit in the Smith Barney stock brokerage and mutual fund unit more than doubled, reaching $668 million before taxes. Morgan Stanley Chief executive James Gorman said the business would drive revenues at the firm: "We are just beginning to see the benefits [of owning 100% of the business]. This business and the acquisition will continue to drive upside for the firm and its stakeholders. We can generate attractive ROEs on the assets supporting the deposits in the retail and institutional businesses even in the low-rate environment and without reaching for risk. This is due to the relatively low funding cost, the lack of bricks and mortar and our embedded client base."

At Bank of America, wealth management operations posted a 26% increase in revenues on a year earlier. Bruce Thompson, the bank’s CFO, said it was the best third quarter the division had ever had. At Wells Fargo, the brokerage unit reported a 33% increase in profits. JPMorgan’s private banking business posted a $200 billion increase in assets over the same period last year. At Goldman Sachs, net revenues in investment management, which includes private banking, were 2% higher than in the same period last year.

The mortgage slowdown was the biggest drag on earnings for the universal banks. Since the Federal Reserve indicated it would be easing its stimulus in the spring, refinancing appetite has fallen. Mortgage-related revenues at Bank of America were $465 million – half that of the same period last year. Wells Fargo, mortgage banking division was down $1.2 billion, and the bank received $87 billion-worth of home loan applications in the quarter, down from $188 billion in the period a year earlier. Its mortgage originations totalled $80 billion, down 42%. At JPMorgan mortgage production-related revenue, excluding repurchase losses, was $584 million, a fall of $1.2 billion (67%) on the previous year, reflecting lower volumes from rising rates and lower revenue margins. Mortgage originations were down 14% year on year.

Pressure on mortgage-related revenues are not showing any signs of easing soon. According to the Mortgage Bankers Association’s most recent estimate, third-quarter mortgage loan refinance activity in the US declined to $189 billion from $342 billion in the third quarter of 2012. The MBA forecasts that total US mortgage production will decline from $1.75 trillion in 2012 to $1.605 trillion this year, and next year fall even further, to $1.091 trillion.

On the plus side, loans are of a higher quality and therefore reserves for bad loans have fallen at the US banks. Bank of America set aside $296 million in the third quarter, compared with $1.7 billion last year. Wells Fargo was able to release $900 million from its reserves. Citi more than halved its loan-loss reserves to $675 million. JPMorgan released $1.6 billion.

In investment banking, FICC brought down revenues. Bond trading is generally slower in the third quarter, but this year was even more challenging for the investment banks because of the macro-environment and uncertainty around the US debt ceiling.

According to Citi Research, revenues were down 25% on the quarter and 22% on the year across the US wholesale banks. At Bank of America, FICC was down 20% on last year’s third quarter. At Citi the bank’s bond-trading revenue dropped 26% (by $956 million). Goldman Sachs’s FICC revenue fell 44% to $1.25 billion. At Morgan Stanley there was also a 44% drop, to $835 million. At JPMorgan, FICC revenues fared better, but were down 8% to $3.4 billion.

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