Bank of America (NYSE: BAC ) is on its way to modest gains for the second day in a row as the bank sits at a 0.7% rise as of 10:30 a.m. EDT. The big news for bank investors this morning doesn't really involve B of A, but it will give its shareholders a glimpse at what's to come next Wednesday when it reports second-quarter earnings.
Bank earnings season officially started this morning when both JPMorgan Chase (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) reported for the second quarter. Both banks topped analyst expectations for both top- and bottom-line growth, giving other investors hope that their respective banks will follow suit. But more importantly, the two earnings reports showed the major trends for the quarter and addressed some investor concerns.
First off was revenue growth, with mortgage originations topping the list of areas to focus on. Both banks reported increased activity year over year, but the rise in interest rates caused a sequential drop in new loans. Bank of America will be watched closely in this segment because of its stated goal of commanding a higher percentage of the market share in home lending.
Both Wells and JPMorgan reported that the number of bad loans in their portfolios had decreased, so provisions to cover those loans were lower. Since B of A has struggled to clean up its portfolio of loans, this may also be a big area of focus for its reported earnings next week.
With the new push by the Fed for increased capital reserve requirements, looking at current levels of reserves will help investors know whether or not their banks will have to scramble to cover shortcomings. Both reporting banks seemed to have their ducks in a row, with Wells reporting a current Basel III Tier I common ratio of 8.54% and JPM stating 9.3% for the same measure.
Of course, one of the most important measures of a bank's profitability, net interest margins, was under close watch this morning as both banks reported narrowed margins due to continued pressures from the low interest rate environment. With the entire market keeping a watchful eye on the Fed and its next move for interest rates, the banks will be expecting a period of transition once rates do rise. But JPMorgan CEO Jamie Dimon made it clear this morning that higher rates would mean lower profits based on the decrease already seen in new mortgage activity.
A lot to think about
Bank of America is generally under a lot of pressure as earnings season rolls around each quarter. With high expectations coming from analysts and investors alike, it can be hard for any bank to live up to them, not just B of A. But for investors, this morning's release of two powerhouses in the industry gives a lot of food for thought and plenty of time to prepare for Wednesday's report. Though B of A has challenges outside of the scope of the JPM and Wells reports, the general trends listed above will be a good place to start for investors looking at the operation's performance in a challenging quarter.
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