As banks report earnings this quarter, investors and the media seem anxious about their prospects.
They should be.
Even though JPMorgan Chase, Citigroup, and Wells Fargo beat analysts' consensus estimates when they all reported Thursday (April 13), the headline numbers don't tell the real story.
Banks themselves had steadily walked down analysts' expectations for almost three weeks leading up to the start of earnings releases, so it shouldn't have come as a surprise that they magically beat forecasts.
Still, all the banks' stocks got hit while the market slump put pressure on them Thursday.
Here's what's really going on with banks, why they were headed lower anyway, and how it spells danger for the economy...
What They're Saying Versus the Truth
Citigroup handily beat earnings per share estimates, coming in 9% higher than consensus forecasts. But that didn't stop Citi's stock from sliding 0.8% after initially opening higher.
The big, positive surprise Citi enjoyed last quarter was a 17% pop in fixed income and equity trading revenue. Of the $4.39 billion generated by trading, fixed income was up 19% and equity was up 10%.
But the real news was underneath the headline positives.
The bank's net interest margin actually fell 3% to 2.74%, even though the Fed raised rates and NIM was supposed to be expanding. John Gerspach, the bank's CFO, talked up future rate hikes on an investor call, trying to put a positive spin on future NIM in the face of the unexpected drop in Q1.
Higher net credit losses at Citi were a weak spot, with consumer banking net credit losses globally up 17% year over year, and up a surprising 33% in North America alone.
JPMorgan Chase had a similar earnings per share (EPS) beat, topping analysts' estimates by 8.5%, and had better than expected trading revenue, too.
But, as was the case with all three banks reporting last week, loan growth slowed across all categories. JPM's CFO, Marianne Lake, defending the bank's huge size and reach, pointed to the slowdown in lending being offset by stronger investment banking revenue.
And then... JPMorgan's stock ended the day 1.2% lower.
Of the big three banks releasing earnings April 13, Wells Fargo (though it beat EPS estimates by 3%) took it on the chin, both in terms of its stock price at the end of the day and what lay under the earnings headline beat.
While bank officials talked up Wells' 18 straight quarters of at least $5 billion in revenue and the bank's "highest in the industry" return on equity and return on assets, it revealed that loan growth fell across the board.
Mortgage lending was down at the nation's biggest housing lender. Auto lending originations were down 5.5% from the previous quarter and down a whopping 29% from last year's Q1. At the same time, Wells' employee count was up by 3,700, even after closing almost 30 branches in the first quarter and after cutting 5,300 heads as a result of the bank's account opening scandal.
Wells Fargo's stock ended the day down 3.3%.
What It Really Means
Underneath all the headline earnings beats and fluff stuff spun by bank CEOs and CFOs, what's going on with these three banks is more than telling.
- Loan demand is falling on the consumer side, as well as commercial.
- Mortgage originations are going in the wrong direction.
- Auto loans are being pared back by banks themselves because of "heightened credit underwriting standards," in response to early signs of rising delinquencies, according to Wells Fargo.
- Net interest margins haven't expanded with rising rates.
The only real bright spots seem to be trading and investment banking. But that could be in danger if there's any movement towards a 21st Century Glass-Steagall Act.
The market weighted heavily on all stocks Thursday, with the banks being no exception. But the banks were slipping early on, even before selling picked up speed as the day wore on.
Under cover of earnings being supposedly beat, the banks are giving back the robust gains they enjoyed from Donald Trump's election. Without any meaningful movement on deregulation, without tax cuts to spur banking activity, and with the president now admitting he's a "low interest rate guy," there's not a lot of sunshine left in the banks' backyards.
As the initial leaders of the Trump rally, their backsliding will likely be a greater weight on the whole market than any other sector.
And if the banks and the markets are slipping, it might not be too long before the economy starts slipping again.
There's just no reason to be buying the banks on this dip. If what's under their sheets gets ironed out and there's more to their earnings than just some fluffed-up top pillows, they'll be worth a look then.
Unless that happens, look out.
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The post The Dangerous Secret Behind Banks' Earnings Reports appeared first on Wall Street Insights & Indictments.
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Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
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