In their latest earnings reports, the biggest banks in the United States are reporting eye-popping levels of profitability that surprise even Wall Street analysts.
JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC) have posted big profit increases that bested analyst expectations. They gained from better credit quality, the absence of heavy provisions that had marred prior quarters, and strong investment banking.
Large banks bested analyst expectations
According to Goldman Sachs Group, Inc. (NYSE:GS) over 90% of banks that have reported so far beat consensus EPS estimates. Credit remains the largest driver of the upside, although 70% of banks also beat on the top-line (vs. only 20% in 1Q). While banks aren’t yet firing on all cylinders, a better U.S. macro has helped capital market activity while reducing credit/other costs. Bank of America Corp (NYSE:BAC) handily beat analyst estimates with 27%, followed by Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC).
Capital markets bouncing back
Goldman Sachs stated that investors had feared that declining fixed income/commodity prices coupled with spikes in volatility would leave some banks on the wrong side of the trade in 2Q. That said, FICC trading revenues were actually up 13% YoY for the group and in-line with estimates for nearly every bank. Equity trading and investment banking were both much better than expectations, up nearly 40%/30% YoY.
JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley and Citigroup Inc. (NYSE:C) are tracking best on a YTD vs. YTD basis. (See below figure.)
A steeper yield curve helps on the margin
The 10-year Treasury is up over 60bp from the end of Q1 without any movement in short-term rates. While net interest income disappointed in 2Q, Goldman Sachs Group, Inc. (NYSE:GS) notes that if long-rates stay here (or especially if they inch higher) most banks will get an EPS boost even without a move in short-rates from better re-investment yields. For banks that estimate the benefit of both a 100bp parallel shift as well as just a 100bp curve steepening, roughly 40% of the revenue upside can be seen just from a move in the long-end of the curve with JPMorgan Chase & Co. (NYSE:JPM) (44%), Citigroup Inc. (NYSE:C) (13%), Bank of America Corp (NYSE:BAC) (44%) and Wells Fargo & Company (NYSE:WFC) (38%)
Leverage ratio manageable, but clouds capital story
While 2Q13 was another solid quarter of capital building for the large-cap banks (Basel 3 capital +15bp QoQ), the introduction of another potentially binding capital constraint in the Basel 3 supplemental leverage ratio creates new capital uncertainty. While the rules for the leverage ratio are not finalized, banks now have to manage their capital to four different capital ratios, with different banks having different binding constraints: Basel 3 tier 1 common (Wells Fargo), stressed tier 1 common (all banks compliant on 2013 CCAR but still arguably the most important ratio for capital return) and a supplemental leverage at both the bank level (Citigroup,JP Morgan Chase) and holding company (Bank of America, Morgan Stanley).