Bank Earnings Show Positive Signs But Disappoint Investors

Joel Anderson |

Friday saw the first earnings reports for Q1 coming from the major banks as JP Morgan (JPM) and Wells Fargo (WFC) released their earnings. Both banks beat expectations and showed a solid quarter on the whole, potentially showing that the mortgage market is on the rebound. Investors, though, appeared unimpressed with the reports as shares fell on bearish expectations.

JP Morgan Beats Expectations

JP Morgan was looking for good news after getting hammered over the course of 2011. Shares in the major bank lost 21.62 percent in 2011 as an ailing economy and bad news from Europe dragged the stock down. The first quarter of 2012 showed a decline in net income of 3 percent, from $5.6 billion to $5.4 billion. However, an EPS of $1.31 was much better than an average analyst expectation of $1.18 per share according to a Reuters poll.

Wells Fargo Also Beats Analysts Predictions

Wells Fargo reported a 13 percent year-over-year jump in profits. Net income available to shareholders rose from $3.57 billion a year ago to $4.02 billion in 2012. The EPS of $0.75 beat out analyst expectations of $0.73 according to a poll by FactSet. Revenues were also better than expected, coming in at $21.6 billion as opposed to expectations of $20.4 billion. Wells Fargo also paid a $0.22 per share dividend, up from last year's $0.12 per share.

"Our shareholders have been very patient, and we are pleased to reward them with an additional return on their investment," said chief financial officer Tim Sloan in a statement.

Improved Mortgage Market Drives Earnings

For both JP Morgan and Wells Fargo, better-than-expected earnings were driven by improvements in the mortgage business.

“Mortgage has been pretty strong over the last quarter or so,” David George, an analyst for Robert W. Baird & Co., said in an interview on Bloomberg Radio. “The mortgage business nationally here in the U.S. has really consolidated and the players that have benefited from that, JPMorgan and Wells Fargo among others, are really going to benefit from that this quarter.”

Wells Fargo reported a jump in its income from mortgage related businesses of 42 percent to $2.87 billion. JP Morgan, meanwhile, had an 80 percent jump in mortgage revenue to $1.6 billion, with profits swinging into the black to the tune of $461 million after losing $1.1 billion last year.

"On the housing side, we're seeing improvement, and we've been seeing that for some time," said Wells Fargo CEO John Stumpf. "When you have the dynamics of higher rental rates and lower home values at attractive financing rates, there's a point in time where the market is going to clear. I think we're getting very close to that tipping point."

"We think housing is getting very close to the bottom," added J.P. Morgan CEO Jamie Dimon.

 Markets Unimpressed

Despite the optimism of the reports, investors were unimpressed. JP Morgan lost 3.64 percent on Friday while Wells Fargo suffered through a sell-off to the tune of 3.47 percent. Markets appeared to be concerned with increased expenses for both banks related to mortgage lawsuits. The fact that earnings beat expectations was also connected to both banks scaling back the amount of capital set aside for future losses.

Paul Miller, an analyst with FBR Capital Markets noted the profits from both banks, but also expressed caution. "But was it a good quality number?" he asked. "Mortgage banking and capital markets tend to be lesser quality earnings as compared to loan-portfolio earnings."

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
BAC Bank of America Corporation 16.72 -0.05 -0.30 49,145,850
GS The Goldman Sachs Group Inc. 175.55 0.43 0.25 2,420,440
JPM JP Morgan Chase 68.80 -0.07 -0.10 9,874,235
TMH Team Health Holdings Inc. 39.95 -0.15 -0.37 993,508
WFC Wells Fargo & Company 45.72 0.20 0.44 20,400,917


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