Aided by a capital markets recovery, mortgage banking, expense management and lower than forecast credit costs, first quarter 2015 earnings of large cap banks were generally better than forecast, notes Credit Suisse.
Susan Roth Katzke and Brian Gibbons at Credit Suisse published a research report on April 17, 2015 titled: “Large Cap Banks” after analyzing the results of seven large cap banks that reported last week. The report was released before Morgan Stanley which reported Q1 earnings this morning.
Earnings – Better than forecast
The Credit Suisse analysts point out that first quarter 2015 earnings of seven large cap banks reporting results last week were generally better than forecast, though they raised estimates only on Citi and Goldman. Though these banks have benefited from a host of factors, the analysts won’t forecast capital markets continuing at 1Q15 levels, and the revenue headwind of low interest rates looks like a more prolonged reality. They point out that this will weigh on 2H15 momentum.
Katzke and Gibbons note material recovery has been seen in trading revenues across the board, relative to fourth quarter results. However, comparisons varied markedly, with Goldman and JP Morgan faring better than Citi and Bank of America:
Large cap banks: Expense management will be key
The analysts note that despite 1Q15 results benefited from capital markets recovery, expense management and lower than forecast credit costs, expense management will be key. They note JP Morgan is clearly moving more quickly to realize its targeted savings, while PNC spoke to intensifying its focus on expense management. Commending Citi’s performance, they note Citi reported 1Q15 results well above expectations with lower absolute expenses and much improved efficiency.
They offer a comparison of Bank of America to Citi in the following table, and note the difference in business line mix will influence aggregate efficiency prospects. They point out that there is an opportunity for both Bank of America and Citi to further enhance their operating efficiency:
The following graph sets forth the operating efficiency ratio comparison of the seven large cap banks:
Katzke and Gibbons, however, note outside of the capital markets and mortgage banking, revenue growth looked no better than forecast. However, striking a positive note looking at the group performance, the analysts are impressed with Wells Fargo’s 3% year-over-year revenue growth:
Turning their focus on RWA balances for GSIBs, the CS analysts point out that risk weighted assets are down 1% relative to year end 2014 results. Looking ahead to 2Q15, they anticipate additional reductions, at JPMorgan in particular, while they anticipate an increase at Bank of America coincident with their expected exit from the parallel run:
Credit Suisse continues to recommend JP Morgan, Goldman Sachs, Wells Fargo and Bank of America in the large cap bank group.