Big Banks Winners and Losers in Q1

by: Stephen Simpson, CFA

With the first quarter in the books and reporting about to start, it seems like a good time to consider what could be in store for some of the country's largest banks. Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) will be among the first major banks to report, and their results and guidance will no doubt set the tone for this sector.

General Thoughts

On the positive side, the banking sector most likely saw ongoing improvements in credit and investors should expect lower provisions. That will mean that reserve releases will once again play a large role in the extent to which banks outperform published estimates, and while they may lead some commentators to carp about earnings quality, it is nevertheless better than the alternative.

Credit and debt markets have been strong, and that would seem to be a positive for those banks with larger holdings of securities as a percentage of earnings assets. On the above-average side sit JPMorgan, Citigroup (NYSE:C), and Bank of America (all of which are also very active in trading), while U.S. Bancorp (NYSE:USB), BB&T (NYSE:BBT), and Wells Fargo (NYSE:WFC) have relatively less exposure.

That said, the outlook for trading revenue does not look so strong and overall investment banking revenues could be a little iffy, as weak equity underwriting may limit upside to the healthy M&A market. That is not a major factor for U.S. Bancorp, BB&T, or PNC (NYSE:PNC), but will be more significant for JPMorgan, Citi, and Bank of America.

Overall, net interest margin is probably still going to be soft and it does not look like there was a lot of loan growth momentum in the quarter. That will not only put a premium on expense control, but it will make company-by-company commentary on loan growth all the more important – after all, the basic formula of “collect deposits, underwrite loans, and profit from the spread” still underlies the banking sector.

Bank of America (BAC)

Positives: Improvements in credit card charge-offs and reserve releases should be good news. Bank of America also has a relatively large asset management and retail brokerage business and those should be positive contributors.

Negatives: BAC probably will not see much momentum in trading and expenses tied to litigation and warranties could offer some headline risk. The bank's relatively high level of non-performing loans (and/or disappointment in their shrinkage relative to other banks) could also be a concern.


Positives: BBT has strong leverage to commercial and industrial lending and that could be a source of loan strength. BBT has also been very aggressive in disposing of bad loans and readying the balance sheet for both higher rates and improving loan growth.

Negatives: Net charge-offs are getting better, but this quarter could still look unimpressive on a relative basis. Likewise, reserve release potential does not look so great. Due to past loan sales, BBT could again post a messy (and confusing) quarter. BBT does not have a significant asset management or brokerage operation, and the company's sizable insurance operations are not likely to impress due to the tough conditions in the P&C market.

Capital One (NYSE:COF)

Positives: Better employment has lifted the performance of credit cards across the board, and Capital One should definitely pick up some positive momentum here. Overall non-performing loans should stay pretty low.

Negatives: Capital One is definitely exposed to the potential loss of fee revenue from legislative and regulatory changes to the card industry. Loan growth could be an issue.

Citigroup (C)

Positives: Citi should see ongoing improvement in credit card charge-offs and non-performing loans, and may in fact post some of the best improvements. The overseas business could definitely boost results, and there is good potential for reserve releases and improved investment banking results. Trading could also be strong on a sequential basis, as the fourth quarter was quite weak.

Negatives: Even with above-average improvements, Citi will likely still have relatively worse credit performance than other large banks. Overall investment banking could be soft and expenses will likely run high. Citi also has relatively little leverage to asset management and brokerage compared to its peers and that could be a good performer this quarter.

JPMorgan (JPM)

Positives: JPMorgan probably won the battle for share in investment banking. JPM should also continue to post improving credit metrics and reserve releases could be a positive surprise once again. Along those lines, JPMorgan has a shot of posting the best credit card charge-offs of its peers and solid shrinkage in non-performing loans.

Negatives: While JPMorgan may be a big player in investment banking, the growth rates may not look all that impressive, particularly in trading. All in all, and the loan to AT&T (NYSE:T) for the T-Mobile deal not withstanding, JPMorgan has relatively lower leverage to improving commercial lending and the sluggishness in the mortgage market could be a weight on loan growth.


Positives: PNC's recent dividend hike does not help the business (and certainly doesn't change the first quarter results already in the books), but it is an expression of confidence on the part of management. Asset management revenue should be solid, as should expense leverage. The company's exposure to corporate service fees should be a positive.

Negatives: Charge-offs could be high, even as credit generally improves. Reserve release potential here seems below-average, and the non-performing loan level is likely to be a bit above average.

U.S. Bancorp (USB)

Positives: Even with the regulatory changes to deposit fees, USB has a lucrative service and fee business and the improvement in the economy should translate into better results through this line. USB also has a good chance of above-average loan growth. All in all, USB may post the strongest revenue growth of the bunch.

Negatives: Because USB never had quite the same credit problems, the juice they will see from reserve releases and non-performing loan shrinkage is less than its peers. A lower net interest margin will reduce some of the benefits of asset growth.

Wells Fargo (WFC)

Positives: With a meaningful presence in asset management and brokerage, Wells Fargo could see some positive leverage from this business in the first quarter. Wells Fargo also has the opportunity to drive better returns from improved expense control as well.

Negatives: While lower mortgage activity may help the expense picture, it puts a damper on near-term growth potential. Wells Fargo also may show less relative improvement in non-performing loans than its peers, and the reserve release here may disappoint (again on a relative basis).

The Bottom Line

Conditions are getting better in the banking industry, though the slow recovery in employment and consumer spending, as well as rising energy prices, are not helping. The real key in seeing the banks get back on their feet is solid loan demand and expanding spreads, but that will not happen right away.

Among the big banks, JPMorgan, and Bank of America still look significantly undervalued, while U.S. Bancorp offers a safer trade with less potential. BB&T is not an especially well-liked name among most analysts, so investors looking for a contrarian trade may want to take a look.

Disclosure: I am long JPM, BBT.