Big Four Bank Earnings: What to Expect

NEW YORK ( TheStreet) -- Bank earnings kick off next week with JPMorgan Chase ( JPM) and Wells Fargo ( WFC) reporting earnings on Friday, April 12.

Analysts do not expect the first quarter report to be a major catalyst for banks, given continuing pressure on margins, slowing capital markets revenues, a seasonal softening in loan growth and an expected decline in mortgage banking income.

"Despite rising 1Q estimates, given 1) sequentially slowing trends throughout the quarter, and 2) our view that 1Q beats will not be large enough to significantly raise investor views of long-term earnings power - we remain on the sidelines with most of these names," Citigroup analyst Keith Horowitz said in an April 2 report. "Given the stocks' recent runs, looking out over the next 12 months we believe higher valuations are more likely to be dependent on higher earnings power rather than a repeat of last year's large-scale multiple expansion."

For universal banks including Bank of America ( BAC), JPMorgan Chase and Citigroup ( C) fundamentals appear to have stalled, according to Atlantic Equities analyst Richard Staite. "Outside of principal investment gains and other market-driven revenues, fundamental top-line growth is fairly modest at the moment as the capital markets recovery remains in fits-and-starts mode," he wrote. "Seasonal factors have helped drive sequential improvements in some areas, but year-on-year revenue growth is mid-single digits, outside of principal investments. Near term, we see nothing to get excited about."

Longer term, a higher return on equity remain "a leap of faith," Staite said, with much uncertainty surrounding banks abilities to adjust to a new regulatory environment.

Analysts will likely remain focused on how banks manage their expenses, given continuing pressures on the topline. Deutsche Bank analyst Matthew O'Connor expects to see a decline quarter-on-quarter as banks reported a number of lumpy one-time items.

The big banks, specifically Bank of America and Citi, are still in restructuring mode, shedding assets and laying off employees, as they adjust to new rules and a different competitive landscape.

Analysts have hailed the downsizing effort, but execution risks remain a key challenge, so the focus will be on how much progress the banks are making in meeting their targets.

Here is a round-up of what to expect from the big four banks.

JPMorgan Chase

Shares of JPMorgan Chase have gained 6.5% in 2013, in line with the KBW Bank Index. Over the past year, the stock has gained a modest 1.9%.
JPM Total Return Price Chart JPM Total Return Price data by YCharts

JPMorgan has not been able to firmly put behind the issue of the massive $6- billion trading losses at its Chief Investment Office caused by what the bank says was a botched hedging strategy.

While the bank finished 2012 with record profits, it continues to be under the scrutiny of regulators and politicians, who see the lapse in risk management at the nation's biggest bank as further evidence that big banks are too big to manage and should be broken up.

JPMorgan also took a knock at the Federal Reserve's stress test. While the regulator approved the bank's plan to buy back up to $6 billion in shares and raise its dividend by 8 cents to 38 cents per share starting in the second quarter, the approval was only "conditional". The Fed said it had identified weaknesses in the bank's capital planning and instructed the bank to resubmit its plan.

Still, analysts remain bullish on the bank in the first quarter. "Don't underestimate a management team with its proverbial back against the wall. Do you remember what JPM posted in 3Q12 after the London Whale debacle negatively impacted 2Q12 results?" KBW analyst Christopher Mutascio reminded investors in a report, noting that third quarter results were well ahead of their expectations.

Analysts polled by Thomson Reuters expect JPMorgan to report earnings per share of $1.38, up from $1.19 in the year-ago quarter. Revenues are expected to drop slightly to $26 billion on weaker trading revenues.

"The stock has underperformed over the past month (+1% vs. +5% for the BKX) on political and regulatory concerns (mostly related to last year's 2Q trading loss). However, with likely another strong 1Q, we believe focus will shift back to the strong underlying earnings power of the company," Deutsche Bank analyst Matthew O'Connor said in a report.

The analyst believes earning momentum will be boosted by continued market share gains and cost management that would generate $4 billion in savings.

The stock currently trades at 1.23 times its tangible book value and less than 9 times its 2013 forecasted earnings per share.

Bank of America

Shares of Bank of America have gained more than 20% in the past year, but have underperformed the KBW Bank Index in 2013. BAC Total Return Price Chart BAC Total Return Price data by YCharts

Among the big themes for the second largest bank in the first quarter will be its efforts to reduce operating expenses. Bank of America has been restructuring its businesses over the last couple of years, shedding non-core assets and laying off employees, but those measures have been offset by high mortgage servicing expenses and elevated legal expenses.

The bank continues to deal with mortgage-related litigation. On Wednesday, it was slapped with a fresh lawsuit from Prudential Financial ( PRU) alleging that the bank and its Merrill Lynch unit engaged in racketeering in connection with a mortgage-backed securities sale.

"While the company's earnings leverage is primarily centered on lower legacy mortgage-related costs and ongoing credit improvement, future earnings are not without risk given the challenging economic backdrop and past track record of generating sustainable EPS growth," Sterne Agee analyst Todd Hagerman wrote in a report Wednesday. "In particular, we remain concerned with BAC's potential litigation and outstanding mortgage repurchase risk. Litigation appears to have only accelerated over the last twelve months as private investors, correspondents and various government agencies/reps continue to pursue legal claims against the largest banks."

Hagerman believes the stock is fairly valued. The analyst expects the bank to report an earnings per share of 22 cents in the first quarter.

Analysts polled by Thomson Reuters expect the bank to earn 23 cents per share on revenues of $23.46 billion.

Bank of America is poised to return more capital this year. The bank passed the Federal Reserve's stress test and said it has the authorization to purchase upto $5 billion in stock and redeem $5.5 billion in preferred stock. It continues to maintain its dividend at a penny a share.

The stock currently trades at about 92% of its tangible book value of $13.15 and at 11.4 times expected 2013 earnings per share.

Bank of America reports April 17.

Citigroup

Shares of Citigroup are up 7.4% year-to-date and 16% over a one year period, versus the KBW Bank Index returns of 6.6% and 9.9% respectively over the same period. C Total Return Price Chart C Total Return Price data by YCharts

Analysts polled by Thomson Reuters expect the third largest bank to report an earnings per share of $1.18, up from $1.11 a year ago, on revenues of $20.13 billion.

Citi is another restructuring play for bank investors. Under new CEO Mike Corbat, the bank has a razor sharp focus on expenses and is laying off 11,000 employees, shutting branches and exiting or winding down its presence in several unprofitable markets.

In a recent investor presentation, Corbat unveiled new performance targets for Citi, including a plan to achieve a return on tangible common equity of 10% by 2015, rising from an adjusted return of 7.9% in 2012. Analysts will be monitoring the bank's progress against those measures, though it is still early days.

Citigroup fared well in the Federal Reserve's March stress test, posting among the highest capital ratios in the regulator's hypothetical severely adverse scenario. Analysts saw this as a sign that the bank had made progress in de-risking its balance sheet

The bank requested permission to buy back $1.2 billion in stock in 2013, a lowball number, as it sought to avoid the embarrassment of a rejection from the regulator. However, analysts expect Citi to return significant capital starting in 2014.

Shares trade at 0.83 times tangible book value.

Citigroup reports April 15.

Wells Fargo

Shares of Wells Fargo ( WFC) are up 7% year to date, outperforming the KBW Banking Index.
WFC Total Return Price Chart WFC Total Return Price data by YCharts

Wells Fargo has had a strong earnings streak in the last 11 quarters as a strong wave of refinancing has boosted fee income and helped offset some of its net interest margin pressure.

The ability to sustain its strong financial performance has been clouded by concerns that interest rates may rise, ending the refinancing boom that has propped up profits.

Analysts expect the bank to report an earnings per share of 88 cents per share on revenues of $21.58 billion. That is down from the 92 cents it reported in the fourth quarter, but still up sharply from 75 cents a year ago.

"We believe Wells Fargo will face some revenue challenges in both net interest income and fee income. Mortgage banking (14% of total revenues) is expected to decline, margin is expected to be under pressure and loan growth is forecasted to slow," wrote Peter J. Winter, a BMO Capital Markets analyst, when initiating a rating on Wells Fargo with a $40 price target and 'market perform' rating in mid-March.

KBW's Chris Mutascio argues that Wells may still be better off than most other banks. According to the analyst, the bank's mortgage banking income last quarter included several one-time negatives, such as below average servicing income and the retention of mortgages some of which could reverse.

"It appears to us that management rarely lets outsized mortgage banking production to fully hit the bottom line. Rather, it uses those robust periods of time to either: 1) improve the strength of the balance sheet (in the past the company has sold low-yielding securities at losses in order to reinvest at higher yields) and/or 2) make strategic investments in the company (can result in a higher expense base during periods of robust mortgage production activity)," he noted, which has helped the bank consistently generate strong earnings.

For Wells Fargo to outperform Wall Street expectations and continue its earnings growth, the bank will need to post flat profitability in its mortgage banking unit by way of an up to 10% rise in home loan originations, an increase in mortgage servicing profitability and expense reductions, which could offset a sequential decline in refinancing activity of up to 40%, according Guggenheim Securities analyst Marty Mosby.

For more on Wells Fargo's future outlook, please read Wells Fargo's LeBron James Earnings Streak A Hidden Opportunity.

After passing Federal Reserve stress tests in March, Wells Fargo said it would boost its quarterly dividend 20% to 30 cents a share in the second quarter, while also increasing share repurchases in 2013.

Shares of Wells Fargo trade at 1.6 times tangible book value and at nearly 11 times 2013 expected earnings per share.

Wells reports on April 12.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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