While economists and analysts fret over the state of the U.S. economy, the financial sector is doing extremely well. Big banks Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) delivered first-quarter earnings reports that surpassed expectations. JP Morgan Chase (NYSE:JPM) lagged because of underwhelming results in its trading operations, but many of its other businesses did well through the first three months of the year.
Improving credit quality, rising net interest margins, and increased loan activity have served as significant tailwinds for these three major banks. As a result Wells Fargo and JP Morgan have sent back a big wave of cash to their investors. Recovering fundamentals and rising dividends are big reasons why you should put these banks on your radar.
Financials leading the way
Wells Fargo had great results across the board. There was almost nothing in its quarterly report to disappoint investors. Its profit grew 14% to hit a record in the most recent quarter. Returns on assets and equity expanded by 8 basis points and 76 basis points respectively. Wells Fargo also grew loans by 3% and deposits by 5% through the first three months of the year.
Citigroup reported less impressive results, but it still beat analysts' estimates and this sent its shares rising after its earnings announcement. Its revenue and earnings per share were basically flat. Deposits increased 3% and loans grew 7% from the year-ago period.
JP Morgan has lagged the other big banks which have reported first-quarter earnings so far. Its profit fell 18.5% because of poor performance at a trading unit and a 21% decline in fixed income revenue. On the other hand, its business banking originations rose 22%, the company grew its deposits and card sales volumes, and it grabbed the No. 1 position in global investment banking. As a result, while JP Morgan disappointed, it's still seeing momentum across several of its major businesses.
This follows the strong industrywide performance seen in 2013, so it's clear the banks' momentum is continuing into the current year.
Signs abound of an improving U.S. economy
The biggest lenders in the United States stand as bellwethers of the economy more broadly. Fortunately, the banks' improving credit quality suggests that the U.S. is finally back on more solid financial footing. Wells Fargo's credit quality improved dramatically last year. Net charge-offs totaled just $963 million, which represented a $1.1 billion decrease year-over-year. Its non-performing assets also fell by a whopping $4.9 billion.
These conditions lasted into the first quarter as well. Wells Fargo's net charge-offs declined by $594 million in the first quarter, so its net charge-off rate dropped 31 basis points. Its non-performing assets fell 18% in the first quarter. This indicates that as more people successfully pay down their debt, the banks are getting healthier as well.
Shareholders being shown the money
As JP Morgan Chase and Wells Fargo see their businesses improving, they're sending loads of cash back to investors in the forms of impressive share buybacks and rising dividends. JP Morgan repurchased $400 million of its own shares in the first quarter and it is authorized to buy back as much as $6.5 billion of its own stock over the next year. In addition, it plans to increase its dividend by 5%. Likewise, Wells Fargo announced that it will increase its dividend by nearly 17% and its Board of Directors increased the company's share repurchase authorization by 350 million shares.
The bottom line is that while Wells Fargo and JP Morgan see their underlying metrics improve, they're able to send more cash back to shareholders. Citigroup didn't get its request to raise its dividend approved because of the recently concluded stress tests, but if its business continues to recover this may be a possibility in the near future. In the meantime, the banks are back to growing their deposits and loans and their credit quality is improving. Investors are reaping the rewards.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.