As promised, big bank earnings were messy, but CEOs keep faith in tax cuts
Don’t tell the big banks that supply-side economics don’t work.
J.P.Morgan Chase and Wells Fargo, the two giants that kicked off fourth-quarter earnings season Friday, are extremely different banks, but surprisingly unified on one key issue: the boost from the Tax Cuts and Jobs Act, passed in December, is just starting to boost economic growth and profits.
“Our expectation, as I said before, just really stepping back, is that there will be growth in the economy,” said J.P. Morga JPM, +1.00% CFO Marianne Lake on a conference call with analysts. “So I think you’ll see the capital market space potentially react more quickly. And I think loan growth may have a bit of a lag, but never say never. So we just need to, I think, be a little patient to see some of that play out, but sentiment is strong. If the tax positions will be improved, profitability will be higher. Things that were rich before will be fairly valued. And so I think it should be all very constructive.”
Tim Sloan, CEO of Wells WFC, -0.33% took a more consumer-oriented approach.
“I mean, there have been millions of employed folks across the country that have gotten pay raises and bonuses and the like and I think that’s a net positive for economic growth,” Sloan told analysts. “As it relates specifically to our consumer loan growth, we believe that we’ll grow mortgage loans this year. We believe that we will grow credit cards this year.”
Shares of both banks stumbled after their earnings releases, but J.P.Morgan’s share price recovered and was up about 0.8% midday, while Wells shares remained 0.7% lower for the day.
Here are a few other bank-specific highlights from the earnings releases.
J.P. Morgan reported per-share earnings of $1.07, versus $1.71 a year ago, but beat the FactSet consensus of $1.69. Revenue of $25.45 billion was 5% higher than the $24.33 billion booked a year ago and beat the FactSet consensus of $25.17 billion.
Net interest income was up 11% to $13.4 billion, beating expectations of $13.2 billion. That—and a lower-than-expected amount of money set aside for bad loans—more than made up for higher-than-expected expenses, noted Barclays’ Jason Goldberg. As widely expected, trading in fixed income, currencies and commodities slid—that segment was down 27% compared with a year ago. Trading in equities was flat.
Also as expected, the fourth-quarter results were made complicated by a one-time $2.4 billion charge stemming from the tax overhaul. With that charge stripped out, per-share earnings were up about 3% compared with the same period a year ago, and revenue was 3% higher.
Read: These companies will take a huge profit hit from lower tax rates
One unexpected hiccup in the quarterly results was a $143 million loss on a margin loan made to an executive of Steinhoff International Holdings N.V., the South African company that owns MattressFirm and other interests.
As KBW analyst Brian Kleinhanzl speculated to MarketWatch before the earnings, banks will hold their cards close when it comes to saying how the tax cuts will guide decision-making. J.P.Morgan said repeatedly it would provide more guidance at its February investor day, but suggested those steps could impact not just employees but customers and “the community,” in particular lower-income borrowers.
Wells Fargo, meanwhile, reported EPS of $1.16, compared with 96 cents a year ago, with revenue of $22 billion. Expectations were for per-share earnings of $1.23 and revenue of $22.45 billion.
The bank was unusual among many American companies in recording a one-time benefit from the tax law, because it had a deferred tax liability, rather than a deferred tax asset. The bank said its effective tax rate in 2018 would be 19%, a “meaningful decline,” according to Edward Jones analyst Kyle Sanders.
“Results were lackluster, especially in terms of Well’s anemic revenue performance and weaker loan growth relative to results reported today by rival JP Morgan,” Sanders said.
However, Sanders added, “we believe the market had relatively low expectations for the fourth quarter. In addition, we believe investors were more focused on the future 2018 outlook in terms of cost-cutting and the new tax rate Wells will pay.”
Wells is still weighed down by its history of consumer misdeeds. It recorded a $3.25 billion expense for regulatory investigations, the sales practices, and other matters. Pressed by one analyst, Sloan said he couldn’t say for sure that ongoing investigations into those practices have determined that everything is now out in the open.
The bank’s community banking division, where those misdeeds went on, saw a 34% increase in net income compared with a year ago.
Barclays’ Goldberg agreed. Earnings “looked light,” he said. He was also unimpressed with Wells’ higher-than-expected expenses. Management announced plans to start significantly closing branches after resisting such a step for some time. Wells will close about 250 locations in 2018, and several hundred more by 2020.
JP Morgan shares have gained 30% in the last 12 months, while Wells has gained 15%. The Financial Select Sector SPDR ETF XLF, +0.62% has gained 25%, the S&P 500 SPX, +0.56% has gained 22% and the Dow Jones Industrial Average DJIA, +0.73% has gained 29%.