JPMorgan & Wells Fargo: No Match for Great Expectations

Wall Street has high very high expectations for bank results this third-quarter earnings season. Maybe that’s why shares in JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) didn’t get much love Friday despite posting better-than-expected results.

JPMorgan, the nation’s biggest bank by assets, clobbered analysts’ bottom-line estimates and beat on revenue, too, but shares of the Dow component were only met with selling.

Meanwhile, Wells Fargo, the country’s biggest mortgage lender and largest bank by market cap, suffered a steep selloff after earnings beat by “only” a penny, revenue came up ever-so-slightly short of Street estimate — and margins contracted substantially.

True, both stocks have been enjoying strong second-half gains, meaning there’s a lot of pressure to give traders a reason to keep bidding. JPM and WFC each bottomed out on June 4. Since then, JPM, rebounding from its London Whale whacking, has tacked on 36%. WFC has added 14%. By comparison, the broader market rose 12% over the same period.

And, at the same time, financials are forecast to be the best-performing sector of the S&P 500 in an otherwise poor earnings season.

Whatever the reason — too-high expectations or just a matter of selling the news — the Street’s immediate reaction to both banks’ results was disappointment, despite the good headline figures.

As expected, strong mortgage refinancing activity — thanks to record-low rates — drove results at both firms. JPM logged record third-quarter profit on soaring revenue from its mortgage business. Earnings jumped 36% to $5.3 billion, or $1.40 a share, easily eclipsing the Street’s forecast of $1.21. Revenue gained 6% to $25.9 billion, ahead of expectations for $24.4 billion.

Mortgages were the biggest contributor to results. Even better, CEO Jamie Dimon said what everyone wants to hear, namely, that the housing market “has turned a corner.”

Additionally, the bank set aside less money for bad loans, suffered only a “modest” loss from unwinding what’s left of the disastrous London Whale trade, and set aside another $684 million for litigation costs. (In its latest headache, JPM is being sued by the New York State attorney general for mortgage securities sold by Bear Stearns, the investment bank JPM acquired during the financial crisis.)

Results from JPM’s investment banking business were another pleasant surprise, as fixed-income trading jumped 33% year-over-year in an otherwise sleepy quarter for capital markets.

As for Wells Fargo, like JPM, it rode a booming mortgage market, helping profits increase 23% to $4.72 billion, or 88 cents a share vs. estimates of 87 cents. Revenue gained 8% to $21.21 billion, but that was shy of the Street forecast for $21.47 billion.

More troubling for Wells was a drop in margins. Yes, record-low rates have folks refinancing their mortgages, but the flip side is that low rates also depress a bank’s net interest margin, or the difference between what it makes on loans and pays for deposits.

The Street was expecting net interest margin to decline, but not by this much. Wells’ net interest margin contracted by 0.25 percentage points, much steeper than the bank’s own forecast of a 0.17-percentage-point decline.

As bad as it may be to miss Street forecasts, it’s always worse when a company blows its own guidance on any given metric.

Bottom line: Shares in both banks sold off on Street-beating earnings — and that could mean we’re in for a rough ride in the weeks ahead.

It looks like expectations are mercilessly high for bank earnings this season. If this keep up, anything less than perfect and pristine beat-and-raise results could be met with more selling.

As of this writing, Dan Burrows held no positions in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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