by Dan Burrows | January 14, 2014 10:47 am
JPMorgan Chase (JPM) and Wells Fargo (WFC) kicked off the earnings calendar for financials with better-than-expected earnings reports, which should help maintain the price trajectories for both JPM stock and WFC stock.
JPMorgan Chase, the nation’s biggest bank by assets, said fourth-quarter earnings declined vs. the year-ago period, hurt by costs to settle a long list of legal headaches.
Most recently, JPM stock had to contend with a $2.6 billion payment to settle claims that it turned a blind eye toward the Bernard Madoff ponzi scheme.
Wells Fargo reported a stronger-than-expected rise in earnings, even as revenue slipped on lower home-loan originations. As the nation’s largest mortgage lender, WFC stock is watched as a bellwether for the housing market, which is feeling the effects of higher mortgage rates.
However, the bottom line for both JPM stock and WFC stock is that their earnings reports beat the Street, thanks to the tried-and-true formula of cost cuts and releasing reserves to juice profits.
Strip away the noise, and both JPM stock and WFC stock look set to take advantage of what is expected to be a good year for the biggest banks.
The JPMorgan earnings report showed a 7.3% drop in quarterly earnings to $1.30 a share, vs. a year-ago profit of $1.39 a share. Excluding billions in legal costs and other items, earnings would have been $1.40 a share, which exceeded analysts’ average estimate by a nickel.
Revenue also slipped, falling 1.1% to $24.11 billion, as it was weighed down by the slowdown in the mortgage business and a drop in activity in the investment banking businesses. However, mortgage operations were more profitable in the most recent quarter — thanks to lower costs — and investment banking beat expectations, too.
Operationally, things continue to improve apace, at that should only fuel further gains for JPM stock. Over the last three months, JPM stock has crushed the market, largely on optimism that the bank’s legal woes and costs are behind it. The regulatory landscape is clearer, too.
Looking ahead, 2014 is shaping up to be a solid year. JPM stock should benefit from improved credit quality, decreasing write-offs, and, of course, an improving economy and housing market. The fourth-quarter earnings report does nothing to dent to bullish thesis on JPM stock this year.
WFC stock is up more than 29% over the last year to easily beat the broader market, and it’s going to need more earnings reports like the latest one if it hopes to continue that outperformance.
Rising interest rates ended the refinancing party some time ago, and they’re tamping down new mortgage-lending too. Although WFC can’t do much to stem the tide on the top line, aggressive cost cutting and higher credit quality are keeping the bottom line healthy — and that’s good for WFC stock.
The Wells Fargo earnings report showed profit grew a better-than-expected 10% clip to $1 a share, beating estimates by 2 cents, even as revenue fell 5.8%. Fortunately for holders of WFC stock, the decline in revenue was more than made up for in cost cuts and improved credit quality. WFC stock has been lifted by layoffs — the bank slashed 6,200 in the second half of last year — as well as reserve releases. Indeed, the release of reserves boosted fourth-quarter profit by $600 million.
Like JPM, there were no nasty surprises in the WFC earnings report. If the long-awaited pick-up in the U.S. economy transpires this year, that should spark its long-sluggish lending business — and that could offer another leg up for WFC stock.
As we’ve noted before, as long as the shockingly bad December jobs report proves to be a fluke, 2014 looks good for JPM stock and WFC stock, as well financials rivals like Citigroup (C) and Bank of America (BAC).
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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