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This week was huge for the nation’s big banks. Among the banks reporting quarterly earnings were JPMorgan Chase (NYSE: JPM), the largest bank in the U.S. by assets, and Wells Fargo (NYSE: WFC), the leader in mortgage originations.
Both banks reported earnings that beat analyst expectations, even though their profits fell from the same quarter in 2015. JPMorgan shares spiked after the announcement and were among the Dow Jones Industrial Average’s best-performing stocks, while Wells Fargo shares were down slightly following its own earnings release.
Investors had a number of concerns heading into this week’s crucial reports – specifically, that long-term interest rates continue to drop, with some in the financial media speculating about the possibility of negative rates in the United States.
In addition, the huge drop in commodity prices over the past two years stoked fears of escalating losses from loans made to the energy sector.
Results Were Weak, But Not as Bad as Feared
JPMorgan was first to the plate, releasing first-quarter earnings on Wednesday. Total profit fell 6% to $5.52 billion, down from $5.91 billion in the same quarter last year. On a per-share basis, earnings declined 6% as well, to $1.35.
Still, the JPMorgan earnings per share figure handily beat analyst expectations, which called for just $1.26 per share in quarterly profit.
Total revenue fell 3% year-over-year, to $24.08 billion, but again that was good enough to beat analyst expectations of $23.40 billion.
Not surprisingly, JPMorgan’s weakest-performing segments were its fixed-income trading segment – which is a highly volatile business – as well as investment banking. Revenue from fixed-income trading and investment banking fees declined 13% and 24%, respectively, in the first quarter.
Its loan portfolio showed the scars of the carnage rippling through the energy market as a result of extremely low oil and gas prices. The company set aside $1.8 billion for credit losses last quarter, nearly double the $959 million in the year-ago quarter. This was offset somewhat by higher loan growth overall. Average core loans grew 17%, an indication that as a whole, the U.S. economy continues its modest growth.
Earnings were also boosted by cost cuts. The company trimmed non-interest expenses by 7% year-over-year, thanks in large part to lower legal fees.
Next up was Wells Fargo, the nation’s third-largest bank by assets, which reported its own first-quarter results on Thursday.
Its financial performance was more impressive on a year-over-year basis. The company managed 4% revenue growth from the year-ago period, while earnings per share declined 4%. Earnings per share of $0.99 beat analyst forecasts of $0.97 per share. Revenue of $22.2 billion also beat, with estimates calling for $21.61 billion.
The reason for Wells Fargo’s relative outperformance is that it relies more on mortgage loans and less on fixed-income trading and investment banking than JPMorgan. The U.S. housing market continues to strengthen, as home prices have risen in several markets over the past year.
Wells Fargo also exhibited strong growth in loans and deposits, which were up 7% and 4%, respectively.
Another boost for Wells Fargo is that it is not as highly exposed to the energy sector. Net charge-offs were $886 million last quarter, up $178 million year-over-year. Its provision for credit losses exceeded net charge-offs by $200 million last quarter. While Wells Fargo is also hurting from the fallout in the energy market, it is not suffering as much as JPMorgan.
Solid Stocks for Value and Income
JPMorgan and Wells Fargo, for the time being, are navigating the difficult climate well. Their earnings are being hit by the prevalence of low interest rates and the weakness in their energy loan portfolios. But they have strong management teams and are growing in other parts of the business.
Investors are nervous, and that is resulting in some fairly low valuations for these stocks. JPMorgan and Wells Fargo respectively trade for 9 times and 10 times forward earnings estimates, which are far lower multiples than the S&P 500 index. They offer solid 3% dividend yields as well.
If commodity prices can manage any recovery from here, and the U.S. economy stays out of a recession, these big-bank stocks look like attractive opportunities for value and income.
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