Wells Fargo’s woes, J.P. Morgan’s jubilation

Wells Fargo and J.P. Morgan announced their second quarter results on Tuesday, which underwhelmed and overwhelmed investors, respectively.

J.P. Morgan’s share price closed up 0.5% on Tuesday, after rising as much as 2% during Tuesday’s trading session, as the US’s largest bank reported forecast-beating results on its top and bottom line.

Wells Fargo, on the other hand, closed almost 5% lower, as the lender missed consensus revenue and earnings forecasts and cut its quarterly dividend by 80%, implying a dividend yield of just 1.6%.

J.P. Morgan

Revenue for the second quarter came in at $33.8bn, above consensus expectations for $30.6bn, and represents an increase of 15% on the same quarter last year. Although earnings per share fell to $1.38 from $2.82 a year ago, this was higher than consensus expectations for $1.01 per share.

As widely expected, its traditionally largest division, Consumer & Community Banking (CCB), reported a year-on-year fall in revenue of 9% to $12.2bn from $13.5bn a year ago, driven by a 26% fall in Consumer & Business Banking revenues. Home lending revenues jumped 51% higher, whilst Card & Auto revenues remained flat.

As reported earlier by Finbytes, loan-loss provisions were set to be a key focus for investors due to its effect on net income and message regarding the outlook. It therefore wasn’t surprising to see a staggering 420% surge to $4.7bn in provision for credit losses, driving net income down by $4.3bn to a loss of $176m in its CCB division.

Average deposits were up 20% while average loans were down 7%, compressing its net interest margin, which is the spread that the bank earns between what it charges on its loans and pays out on its deposits.

Offsetting declines in its CCB division, its Corporate & Investment Bank’s (CIB) revenue rose 66% to $16.3bn, driven by its largest sub-division, Markets & Securities Services, rising 77% year-on-year to $11.3bn.

Fixed Income revenues rose 99% to $7.3bn with particularly strong performances in rates, credit, emerging markets and currencies, while equities trading revenues were up 38%, as derivatives and cash equities saw strong activity.

Finally, J.P. Morgan grew its share of the global investment banking fees wallet to 9.8%YTD, as revenue in its banking division grew 46% to $5bn. Debt and equity underwriting revenues were up 55% and 93%, respectively, to $1,268m and $977m, while advisory revenues lagged, but still increased 15% to $602m, as global M&A volumes in Q2 sank to levels not seen since Q3 2009.

Wells Fargo

Unlike J.P. Morgan, Wells Fargo doesn’t have a large capital markets and advisory business on which it can rely to offset weak performances in its traditional loans and deposits business.

Q2 revenue fell 17.6% to $17.8bn from $21.5bn a year ago, which came in below consensus expectations for $18.4bn. Analysts were expecting a loss per share of $0.20, however, Wells Fargo posted a $0.66 per share loss, as it recorded a $9.5bn provision expense for loan losses, which included $1.1bn in net charge-offs for loans.

Net interest income, Wells Fargo’s largest revenue driver, fell to $9.88bn in Q2 from $12.1bn a year ago, as its net interest margin fell by 33 basis points from 2.58% in Q1 to 2.25% in Q2, while non interest income fell by approximately $1.5bn to $8bn.

CEO, Charlie Scharf, commented that the bank was “extremely disappointed” in this quarter’s results and its decision to cut its quarterly dividend from $0.51 to $0.10 per share, however stressed “an eventual economic improvement combined with our actions to increase our margins will support a higher dividend in the future”.