Now that most large cap banks have reported their performances for the third quarter, we see the big four banks in the U.S. benefiting from a visible trend of strong improvement in revenues from mortgage banking due to record low mortgage rates. The big four banks will also benefit from the resultant refinancing, improvement in credit quality associated to a recovery to the housing value, and more than expected revenues accruing from capital markets. However, the banks face headwinds from declining net interest margins, as a result of the Fed's continuous efforts to bring down long-term interest rates. Going forward, we expect Wells Fargo (WFC), Citigroup (C) and JPMorgan (JPM) to benefit from the rebounding U.S. housing markets; improved capital markets activity will also support the top line for these banks.
JPMorgan, the largest U.S. bank in terms of assets reported better than expected earnings for the third quarter. Earnings per share of $1.4 surprised analysts by over 14%, who were expecting consensus mean of $1.22 per share. The reported revenues of $25.1 billion exceeded expectations by 1.05%. Mortgage banking unit of the bank is said to be a reason for such an improvement in results. Profits from the unit surged 57% from the profits for a year ago. The bank benefited from a surge in refinancing due to record low mortgage rates. Around 75% of mortgage volumes accounted for refinancing. The bank also reported growth in consumer and business banking, reflecting optimism in the recovery of the broader U.S. economy.
The results were also supported by an improvement in credit quality, as net charge offs declined 19% sequentially, while nonaccrual loans dropped 5% over the same time period.
The improvement in the third quarter's results were partially offset by a compression in the net interest margins, which dropped from 2.66% at the end of the third quarter of the previous year to 2.43% at the end of the third quarter of the current year.
Going forward, the bank will face headwinds from the ongoing investigations regarding the massive trading loss.
Wells Fargo met analyst expectations when it reported its earnings of $0.88 per share for the third quarter. Despite the fact that revenues for the third quarter remained flat relative to the linked quarter, the earnings reported by America's leading home lender were termed as record, as it surged 21% YoY and 27% sequentially. As revenues from mortgage banking climb 50% YoY, the bank continues to eat up the market share in the U.S. mortgage banking.
The bank also reported solid credit quality, as third quarter reported provision for credit losses stood at $767 million lower than the net charge offs. This was primarily due to an increase in net loan charge-offs, resulting from the implementation of OCC guidance and due to a $200 million reserve releases due to strong underlying credit performance when compared to the linked quarter.
The results for the third quarter were adversely affected by a lower net interest margin of 3.66%, which was clearly a result of the flattening of the yield curve, and the prolonged low interest rate environment that the Fed is committed to keep until 2015.
Removing the effect of onetime items, Citigroup reported earnings per share of $1.06, topping estimates of $0.99 per share, while revenues of $19.4 billion surpass their expectations of $18.8 billion. The results were significantly affected by a multibillion dollar loss resulting from the exit from Morgan Stanley Smith Barney, which also partially became the reason for former CEO Vikram's exit.
The bank reported strong core business figures during the third quarter, while revenues from fixed income surged by 63%. However, the bank was unable to capture its market share from the boom in mortgage refinancing when compared to most of its peers. Revenues from mortgage originations, refinancing and retail banking jumped 6%, lower than the boost in revenues from mortgages for JPM and Wells Fargo. The bank reported a drop in mortgage originations of 15%.
Bank of America (BAC)
Bank of America reported adjusted earnings per share of $0.28 per share against consensus estimates of $0.18 per share, surprising analysts by 55.5% on revenues of $20.7 billion against estimates of $21.8 billion. The results for the third quarter were positively affected by higher mortgage lending, higher revenues from trading activities and strong investment banking revenues, and improvement in credit quality. The revenues from mortgage banking surged 12% sequentially. The results were, however, hurt by significant litigation that surrounds the bank.
Going forward, the bank will face headwinds from the ongoing litigation; however, the improvement in U.S. housing markets will benefit the bank.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.