JPMorgan Chase & Co., (JPM) and Wells Fargo & Co. (WFC) reported third quarter earnings. The news headlines present expected focus. In the case of JPMorgan, the focus was on the cost of current litigation: "JPMorgan Reports Loss after $9.15 Billion Legal Expense."
In the case of Wells Fargo: "Wells Fargo Income Rises 13% on Improved Credit." In the JPMorgan case, the charge for legal bills was expected. And, since these were expected, the banks' management loaded up, taking as much as is reasonable to lessen the impact on future earnings results. The bank also cut back by two-thirds its provision for loan losses.
In the Wells Fargo case, the game is still to provide lower provisions for loan losses in order to keep the earnings flowing. Tom Braithwaite of the Financial Times has recently had something to say about this: "US Banks Run Out of Time to Kick Reserve-Release Habit." He basically asks the question, "How much longer can US banks continue to goose up earnings through lower loan loss provisions?"
Instead of focusing on these adjustments to earnings, how about these numbers?
- Revenues at JPMorgan Chase were down 7.7 percent, year-over-year.
- Revenues at Wells Fargo were down 3.5 percent, year-over-year.
Certainly the mortgage business at both of the banks are lower due to the fact that longer-term interest rates are higher this year than they were last year.
There is some improvement in other loan areas but, in general, the performance of the banks was hurt by a decline in the net interest margin achieved. For Wells Fargo the net interest margin was 3.38 percent in the third quarter of 2013. The net interest margin was 3.66 percent a year ago. JPMorgan experienced a similar drop in its net interest margin.
The earnings releases of the banks contain all sorts of information about this thing and that thing. The basic fact is, however, that the fundamental business of banking is performing so strongly these days and there is still too much reliance on cost cutting and the release of reserves. For example, JPMorgan is still heralding a $1.0 reduction in expenses related to a reduction in employees still to come.
These results do not strengthen the confidence one has in the strength of the banking system and the health of the economy. Commercial banks are still holding about $2.4 trillion in excess reserves at the Federal Reserve. The largest twenty-five domestically chartered banks in the country have experienced a substantial increase in their cash assets in the third quarter, most of it coming in September. (There has been a further increase in cash assets at these banks since October 1 due to the shutdown of the U.S. government and the possibility that the debt ceiling will not be raised, but that is another issue.)
These are not signs of strength in the banking sector. The large banks must want these excess reserves and the Federal Reserve has not been shy in providing them with the reserves. And, that is the picture of the banking system I am getting from the latest releases from the banks, themselves.