Softer trading revenues and loans weigh on EPS

Jefferies analysts, Ken Usdin, Bryan Batory, and Thomas Shearer, have reduced their earnings per share (EPS) for 2014 and 2015 for Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C). They believe that trading revenues and net interest income (NII) could fall for Bank of America. Lower trading revenues will also reduce Citi’s EPS. In JPMorgan’s case, increases in investment banking compensation could weigh on margins in light of a decline in trading revenues.

Citigroup, Bank of America, JPMorgan EPS

Source: Jefferies LLC

Despite softer revenues, Usdin, Batory, and Shearer see value in Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C). They highlight that the three banks are trading at a 2015 estimated Price/Earnings (P/E) that is less than 10 times, or 63% of the S&P 500 P/E. Jefferies analysts favor Bank of America and JP Morgan Chase over Citigroup as they are concerned about Citigroup not reaching its 2015 return targets.

JPM, BAC, C operating EPS

Source: Jefferies LLC

Lower trading and loan revenue and higher legal expenses weigh on BAC

Jefferies analysts lowered their second quarter 2014 EPS estimate for Bank of America Corp (NYSE:BAC) from $0.22 to $0.19. Lower trading revenue and NII together with uncertainty on magnitude on legal expenses drove the downward revision. Jefferies’ gross of legal expense EPS forecast is $0.31, which results in a legal expense estimate of $0.12 per share, or $2 billion. The media and other analysts estimate that the Department of Justice (DOJ) settlement could cost up to $17 billion. While Jefferies analysts recognize that their legal fee estimate may be low, they highlight that removing uncertainty around legal costs could help Bank of America regain some investor interest and narrow its guidance on the long term. The immediate repercussions of a large DOJ settlement will be lower EPS and a lower capital base.

Bank of America net loans

Bank of America’s net loans – Source GuruFocus.com

Bank of America EPS revisions

Source: Jefferies, Factset

Concerns about Citigroup’s 2015 return targets

Like Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE:C) faces lower trading revenues for the remainder of 2014 and 2015. Citigroup is also involved in DOJ proceedings and the settlement amount is not defined. Consensus and media estimates also fall in a wide range, reaching up to $10 billion. However, the impact of a DOJ settlement on Citigroup’s capital base is larger. For every $1 billion of non deductible cash payment, tangible book value will decline by $0.33 versus $0.09 for Bank of America. Jefferies has reduced their second quarter 2014 EPS forecast for Citigroup from $1.16 to $1.03.

Citigroup Net loans

Citigroup’s net loans – Source GuruFocus.com

Citigroup EPS revisions

Source: Jefferies, Factset

JPMorgan Chase’s higher compensation drag on earnings

To reflect management’s estimate of a 20% year over year decline on trading revenue and higher compensation costs, Jefferies analysts lowered their second quarter 2014 EPS projection from $1.25 to $1.23. This is lower than the consensus estimate of $1.32 EPS. In Jefferies view, JPMorgan Chase & Co. (NYSE:JPM)’s earnings are more predictable as non-compensation expense estimates are in a narrower range. Market share gains across investment banking, credit card fees, service fees and assets under management support a favorable long term outlook.

JPMorgan Net loans

JP Morgan Chase’s net loans – Source GuruFocus.com

JPMorgan EPS revisions

Source: Jefferies, Factset