The Q2 earnings reporting season kicked off in earnest on Friday as a number of Wall Street titans reported results.
Overall, expectations for profitability remains high: According to FactSet, factoring in the typical earnings beat rate, analysts have penciled in the second-best quarter of earnings growth since the end of 2011.
Investors pretty much ignored efforts by big bank executives to cool estimates a little, to no avail, by talking up weak trading revenue in recent weeks.
But now, as hard numbers start flowing out, disappointment is in the air. Here are three big bank stocks suffering in response:
Big Bank Stocks in Trouble: Citigroup (C)
Citigroup Inc (NYSE:C) shares are down 0.5% as I write this, recovering from an opening tick drop that took shares down 2.2%. C reported earnings of $1.28 per share — 7 cents ahead of estimates — on a 2% rise in revenues. That seems good, but it represents a 3% decline from last year as higher revenues were more than offset by a higher cost of credit and increased operating expenses.
The cost of credit, which jumped 22% from last year, was driven by an increase in net credit losses of $94 million. This is classic late-cycle behavior (a rise in non-performing loans and defaults) and could further pressure Citigroup earnings should it continue and force an accumulation of loan loss reserves. The post-recession release of loan loss reverses, as default rates improved, was a massive tailwind for financial sector earnings in recent years.
Big Bank Stocks in Trouble: JPMorgan Chase (JPM)
JPMorgan Chase & Co. (NYSE:JPM) shares are down 1%, after falling as much as 2.7% at the open, falling out of a three-week topping pattern near resistance from its early March high around $93. A violation of its 20-day moving average near $90 would break a three-month uptrend and set up a test of the late May lows near $82, an 11% decline from here.
The decline in JPM came despite a top- and bottom-line beat: Earnings of $1.82 per share beat estimates by 23 cents on a 4.6% rise in revenues. Core loans increased 8% from the year-ago period. Credit costs declined slightly, thanks in part to a loan loss reserve release. But pressure was seen in the mortgage business, where revenue fell 26% on higher funding costs and lower production margins.
Also, on the post-earnings calls, CEO Jamie Dimon went a bit crazy and roared about how embarrassing it is, as an American, to listen to “this stupid **** we have to deal with” out of Washington D.C with a few audible pounds on the table for effect.
Big Bank Stocks in Trouble: Wells Fargo (WFC)
Wells Fargo & Co (NYSE:WFC) shares are down 0.7%, after dropping as much as 2.7% after reporting results at the open. Last quarter, WFC attracted some attention for the poor loan growth trends it reported. This quarter repeated the theme. The company reported earnings of $1.03 per share, 2 cents ahead of estimates, on a 0.2% rise in revenue.
But here are the kickers: Auto loan originations fell 17% from the prior quarter and 45% from last year, mortgage loan originations fell 13% from last year and the mortgage loan pipeline contracted 28% from last year. Watch for a decline to support near the 200-day moving average, a level that has provided support for WFC multiple times since April.