EC JPMorgan’s Positive Kickoff To Bank Earnings

JPMorgan (JPM - Free Report) is not only biggest player in the banking industry, but it also has a well-earned reputation of being properly run. Wells Fargo (WFC - Free Report) had that kind of shining reputation some time back, but that is a thing of the past, at least at this stage. JPMorgan’s reasonably good quarterly results reconfirm its leadership position and likely provide read-throughs for its peers that are on deck to report results in the coming days.

As expected, both JPMorgan and Wells Fargo came out with one-time charges and gains related to the tax law changes. We will be seeing more of these one-time charges from other industry players in the coming days and some of these charges will be really big (Citigroup is expected to take a $20 billion charge), but we have to look past them and analyze real underlying trends. The tax legislation is producing these charges in the Q4 earnings reports, but we know for a fact that the new tax regime will benefit the profitability of banks (and other industries) directly as well as otherwise.

These tax-related charges and gains aside, the set up for bank earnings is not that different from other recent quarters. Net interest margins remain under pressure as a result of low interest rates, growth in loan portfolios has been decelerating and trading revenues remain weak. We may have been almost a decade removed from the last financial crisis that shook the industry to its roots, but banks have yet to reach their full earnings power.

JPMorgan did as well as possible in this relatively difficult earnings environment for banks, but we can’t say the same about Wells Fargo. JPMorgan’s loan portfolio increased +4%, with commercial & industrial loans up +6% and credit cards up +5%. The -1% decline in Wells’ loan portfolio partly reflected the impact exit from auto lending, but there was weakness in other areas as well.

Wells’ margins also suffered, with Q4 net interest margin at 2.84% below the preceding quarter’s 2.86% level and the year-earlier 2.87%. JPMorgan’s net interest margin was modestly up, both sequentially as well as year over year. PNC Financial (PNC - Free Report) also showed gains in net interest margin as well as loan portfolio, which likely offers a more relevant read-through for other regionals on deck to report results this week.