Q1 Bank Earnings Announced

This past Wednesday, Bank of America made headlines when it dramatically missed analysts' expectations for its first quarter earnings - the consensus was a profit of $833 million, the bank reported a loss of $276 million.  The loss was directly connected to increased litigation costs, which we blogged about as a potential source of trouble for banks in 2014, with the majority of the expense related to the bank's settlement with FHFA (discussed in the same post).  Bank of America actually beat consensus estimates of $22 billion in revenue with $22.8 billion, but the increased legal expenses caused its first quarterly earnings loss since 2011.  The scale of the quarterly litigation costs, which are almost triple the amount of any quarter since 2012, can be seen in the chart below.

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JP Morgan reported results on April 11, and also missed analysts’ expectations, reporting earnings per share of $1.28 compared to a forecast $1.43.  The miss was caused by a 17% decline in trading revenues rather than litigation expenses, which has not been a problem for the bank so far this year.

Of those that have announced earnings, Wells Fargo has been a big winner of Q1 reporting, with earnings per share of $1.05 against analysts' forecasts of $0.97 cents.  Its wealth-management unit produced 41% growth in net income, paving the way for an 8% increase in revenue on higher asset-based fees and net interest income.  This was a positive surprise, and led analysts to revise expectations for the bank's annual performance. 

Citigroup reported earnings on Monday, meeting analysts’ expectations of $1.23 earnings per share exactly, with revenues coming in slightly higher than expected ($20.1 versus $19.4 billion).  Without credit and debt valuation adjustments, earnings would have been $1.30 (on a non-GAAP basis).  Recently the firm suffered an embarrassing blow when the Fed rejected its annual capital deployment plan again, and it had to restate Q4 2013 financials in February as a result of fraud in its Banamex unit, so the upbeat earnings are seen as a great success.  Lower expenses and smaller losses on its troubled assets led to the outperformance, despite a drop in trading revenue similar to that experienced by JP Morgan, and legal fees related to the fraud investigation and restatement. 

Goldman Sachs reported earnings yesterday of $4.02, beating analysts' estimates of $3.43, though this figure is down substantially from the last quarter and the first quarter of last year.  Investment banking fees and reduced expenses offset a large drop in trading revenue, similar to what other banks have reported.  Provisions for litigation remained in-line with those from the first quarter of 2013.

Morgan Stanley announced that it had reversed the trend downward in fixed-income and commodity trading reported by other banks, and had capitalized on a strong wealth management performance like Wells Fargo.  Its earnings of $0.72 cents per share beat analysts' estimates of $0.60 cents.

Since the time that the first bank reported earnings (April 11), shares of Morgan Stanley are up the most, capitalizing on its growth in trading as well as wealth management (like Wells Fargo - also up).  Shares in Citigroup also rose, reflecting the market's positive opinion of the bank meeting earnings estimates despite some real challenges.  JP Morgan has been punished for its miss even more than Bank of America (essentially flat), perhaps reflecting the fact that it was caused by core operations, rather than outsize litigation expense.

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