JPMorgan (JPM) delivered dismal first-quarter earnings this morning, saying that several parts of its business have been hit especially hard early in 2014.
It’s possible these setbacks are specific to JPMorgan, but more likely they’re industry-wide. Either way, that definitely can’t be good for JPM stock, and if it’s the latter, financials in general should be on watch.
Should investors sell JPM stock amid this pretty ugly earnings report?
Well, the answer actually lies in Wells Fargo (WFC), whose first-quarter earnings report is a good measuring stick.
Q1 Earnings Recap
The first number in the JPMorgan earnings report that jumps out at me is the 19% decline in net income to $5.3 billion. A cool $1.3 billion was sliced off the bottom line in the first quarter thanks to poor performances by both its mortgage and fixed income businesses.
The second number — all the way up the income statement on the top line — saw net revenue decline by 8% year-over-year to $23.9 billion.
The third number? Return on assets of 0.89%.
In comparison, WFC saw its bottom line jump 14% in the first quarter to $5.9 billion, net revenue declined only 3.3% to $20.6 billion, and Wells Fargo’s RoA was 68 basis points better at 1.57%.
With all three numbers in Wells Fargo’s favor, it’s no wonder that JPM stock is taking a hit while WFC stock is doing fine.
There’s no tactful way to describe the performance of the JPMorgan mortgage banking business — it plain stunk.
Mortgage production revenue declined 76% year-over-year on lower volumes with originations down 68% and 27%, respectively, when compared to Q1 2013 and Q4 2013. As a result of these lower revenues, JPMs consumer and community banking, which includes its mortgage business, saw net income decline 25% to $1.9 billion.
As a result of continuing weakness in mortgage activity, the consumer and community banking segment has laid off 14,000 people over the last year. That’s never a good sign.
OK, Wells Fargo’s mortgage banking business isn’t much better. Non-interest income from mortgage banking dropped 46% year-over-year to $1.5 billion. It had $36 billion in mortgage originations in the first quarter, 68% less year-over-year with applications off 57% to $60 billion. As a result of this weakness, WFC was forced to lay off 1,100 full-time employees this past quarter.
When it comes to mortgage banking, WFC stock is in exactly the same boat as JPM stock. Investors can’t be happy with this predicament.
Fixed Income Not Producing
Last year’s first quarter was much rosier for fixed-income products in terns of performance and in terms of client activity. The double whammy caused revenue in fixed-income markets to decline 21% year-over-year to $3.8 billion. Fixed-income revenues accounted for 15.9% of JPM’s overall first-quarter 2014 revenue compared to 18.2% in the year-ago-period.
This 230-basis-point decline is a big reason why JPMs net income was off by $1.3 billion in the first quarter.
Wells Fargo doesn’t break this information out.
Analysts expect fixed-income trading to be down for most Wall Street firms in Q1, and that’s definitely not good for JPM stock … or anyone else dealing in that segment, really.
A Few … Special Circumstances for WFC
While it’s true that Wells Fargo increased its net income in the first quarter while JPM did not, it’s also true that WFC’s bottom line was helped by several factors that likely aren’t repeatable:
- Wells Fargo booked $734 million in additional gains from equity investments in the quarter — a 650% increase year-over-year. The likelihood of that happening in Q1 2015 is remote at best.
- Due to the layoffs mentioned earlier, WFC saved more than $200 million in employee benefits, which goes straight to the bottom line.
- Finally, Wells Fargo reduced its provision for credit losses in the quarter by 73%, or $843 million.
In these three items, you’re talking roughly $1.8 billion in additional revenue. Without these, it’s certainly enough to change a bad report into a good one.
JPMorgan earnings in Q1 were nothing to write home about, but the same can be said for WFC. It’s likely that all of the big banks will deliver spotty earnings.
Long-term, I don’t think it’s anything to worry about. In fact, if you own JPM stock, I’d certainly consider investing some more should it drift down into the low $50s.
As for WFC, it’s up 30% over the past year through April 10 — significantly higher than either JPM stock or its banking peers. Once investors realize its earnings were also mediocre, I see its stock cooling off for a stretch.
At this juncture, I wouldn’t be too gung-ho about any of the big banks. But at the very least, I wouldn’t worry about JPM.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.