“They’re making their numbers for all the wrong reasons.” -- Michael Mullaney, CIO, Fiduciary Trust.

[ by Melanie Gretchen ]

Bank of America and JPMorgan Chase first led the largest U.S. banks with positive earnings reports, then led them to share price declines.  Despite 4 banks' net income exceeding analysts' estimates, the 6 winners experienced a great loss, in revenues and investor confidence.

Bank of America, JPMorgan, Wells Fargo, Goldman Sachs, and Morgan Stanley boosted Q1 profits by a combined 45%.  But, according to the KBW Bank Index that tracks shares of 24 U.S. lenders, share prices fell nearly 5% on average since 4/11 - the day before JPMorgan and Wells commenced quarterly earnings announcements.  That decline was the index's worst performance during any of the largest banks’ earnings seasons since Q2 in 2010.  What really hurt was the drop in combined revenue of 2.5%.  To improve the profits picture, the banks utilized accounting charges, a mix of tax benefits, headcount reductions and decreased expenses.

"They’re making their numbers for all the wrong reasons.  It’s definitely troublesome." -- Michael Mullaney, the chief investment officer at Fiduciary Trust, which manages about $9.5 billion including shares of Wells Fargo and JPMorgan.

A State of Change (For the Worse). Since stock climbed 63% climb during the 17 and a half months leading up to 3/15, the KBW Bank Index has fallen 6.1%.  In turn, The Standard & Poor’s 500 Financials Index, tracking 81 companies, has suffered a 3.4% decrease since mid-March, compared with a 1.2% decline in the broader S&P.

Beginner's Luck? Newly minted Citigroup CEO Michael Corbat, 52, set the bar high.  The 3rd-largest U.S. lender by assets posted with a 30% jump in profit, boosted by fixed-income trading and investment banking, which beat analysts' estimates.  Going forward, banks will generate revenue by trading a narrowing of their net interest margin, a gauge of lending profitability, for loan growth and mortgage production, according to Goldman Sachs analysts led by Richard Ramsden.

The Next Step. As banks struggle to increase revenue, they’ll probably trade a narrowing of their net interest margin, a gauge of lending profitability, for loan growth and mortgage production, Goldman Sachs analysts led by Richard Ramsden said today in a note.  Other banks' strategies are including:

• Bank of America: lowering risk, according to CEO Brian Moynihan.
• Citigroup: tax benefits and declining reserves for loan losses
• Regional banks: cutting costs and setting aside less for sour loans to bolster profit.  Case in point: the 6 biggest bank cut expenses by 6.1% to a combined $71.6 billion

What firms need “is an environment in which global trading and investment-banking revenues grow reasonably in line" with global nominal gross domestic product.  "Until this happens, the earnings leverage is achieved on the expense side, and this is finite." -- Chris Kotowski, an analyst at Oppenheimer & Co., in an April 16 note.

For further details, go to [Bloomberg, 4/19/13].