JPMorgan, Wells Fargo Earnings: Decline In Core Trading

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Credit Suisse analysts Moshe Orenbuch and Jill Glaser Shea provide an outlook on JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) earnings, which were reported early this morning.

This morning, JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) reported 4Q’13 earnings. Overall 4Q results were generally as expected with results reflecting improved credit quality (although slowing), solid IB fees, weaker mortgage banking and relatively flat core expenses.

Mixed trends in NIM among JPMorgan and Wells Fargo

Mixed trends in the NIM among JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC). JPMorgan’s NIM was up 2bps q/q helped by higher securities yields. However, the NIM declined 12bps q/q at Wells Fargo due to continued balance sheet re-pricing. Average loan growth improved q/q at both JPMorgan (+3% ann) and Wells Fargo (+6% q/q ann.). Better loan growth helped support spread income, up 1% q/q at JPMorgan and Wells Fargo.

Decline in core trading

Core trading declined 13% q/q at JPMorgan Chase & Co. (NYSE:JPM) and down 18% at Wells Fargo & Co (NYSE:WFC). At JPMorgan, core trading was $100mm weaker than our forecast with better FICC offset by weaker equities trading, while trading results at Wells Fargo were in line with our forecast. JPMorgan’s core FICC trading declined 7% q/q and core equities trading declined 30% q/q. While core trading was a bit weaker than our forecasts at JPMorgan, we would note that equities trading was weaker which may be company-specific and not necessarily a good read-through to peers. For IB fees, revenues were up 11% q/q at JPMorgan which came in better than our forecast of a 2% q/q increase. Our IB forecasts for Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) are for revenues to increase 15% q/q and 6% q/q, respectively. At JPMorgan, advisory was strong (+35% q/q) as well as equity underwriting (+31% q/q) while debt underwriting was weaker (down 6% q/q).

Mortgage banking activity

Core mortgage revenues declined 55% y/y at JPMorgan Chase & Co. (NYSE:JPM) and down 54% y/y at Wells Fargo & Co (NYSE:WFC) which came in slightly better than our forecasts of a ~58% y/y decline.. Origination volumes came in lower than expected, down 42% q/q at JPMorgan and -38% at Wells Fargo (we were forecasting down 27% q/q). GOS margins were better than our forecasts, up q/q at both Wells Fargo and JPMorgan. Servicing revenues improved and MSR valuations were up 4bps at JPMorgan and 6bps at Wells Fargo. Wells Fargo applications were down 25% q/q.

Credit quality improvement slowdown

NPAs declined 5% q/q and NCO’s declined 1% and a bit slower than our forecasts (estimate a 4% decline in NCOs at large bank peers). Card losses were flat to up at JPMorgan Chase & Co. (NYSE:JPM)/Wells Fargo & Co (NYSE:WFC) versus our peer forecasts which calls for a 21bp decline.

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