Bank Earnings Are Off to a Great Start

Three of the nation's biggest banks kicked off earnings last week, and the results have been promising. With one exception thus far, large banks have seen their first-quarter net incomes rise by double-digit percentages compared to the year-ago period.

As The Motley Fool's Gaby Lapera and John Maxfield discuss in the following segment of Industry Focus: Financials, JPMorgan Chase (JPM 0.65%) and Citigroup (C 0.26%) led the way, with Wells Fargo (WFC 2.73%) turning in the one disappointing performance among too-big-to-fail banks. Listen in below for more details about how each of these banks performed.

Gaby Lapera: So far, JPMorgan, Citi, and Wells have all reported. Bottom lines for JPMorgan and Citi look good.

John Maxfield: Yeah, both of them were up 17% on a year-over-year basis. When you're talking the biggest banks in the country, and among the biggest banks in the world, it's not often that you're going to see earnings grow by double-digit percentages on a year-over-year basis.

Lapera: Yeah, that's pretty exciting. We were talking a little bit before the show, and it looks like it's mostly driven through their trading and investment banking. All these big banks, well, Wells kind of, but JPMorgan and Citi especially are universal banks. That means they have two separate arms. They have their retail arm, where they're doing what you traditionally think of as a bank's business, like giving out loans and collecting interest and doing whatever it is that big banks do. The other side of it is this investment-banking side. That's where they saw the big gains this quarter.

Maxfield: Yeah. If you think about where we were at this point last year -- and I want to say, I'm going to be totally selfish here, but there's a part of me that wishes we were where we were at this point last year, because that's where, as an investor, we had gone through a huge correction in the market, and as an investor, that's the absolute best time to be in. Right now, everything looks so expensive, so I'm thinking back so fondly on those days. But if you think back to the first quarter of last year, which is what the banks were comping against in the first quarter of this year, there were two things in particular that really helped those comps shine. The first is that oil prices dipped below $30 a barrel. They got down to around $25 a barrel. And that is really, really low. The problem with that for banks -- even though it's great for consumers -- is that if you lend money to energy companies and the price of oil goes down that far, some of those companies that are operating with really tightened margins aren't going to be able to service their loans. So that made banks increase their loan-loss provisions in anticipation of future loan losses from the energy industry. Oil prices have since been on the mend. So they didn't have that concern this year, so they were able to scale down their provisions. Provisions act on income in the same way that expenses do. So it just freed up a whole bunch of revenue to fall to the bottom line.

The second point, to the point that you're making, Gaby, is that there is also in that first quarter is when the United Kingdom announced that it was going to have a referendum on whether or not it would stay in the European Union. Now, that actual vote didn't happen until later in the year, but that announcement, in addition to concerns about slowing economic growth in China, caused an enormous amount of volatility in the various types of capital markets, and that translated into lower trading revenues for banks. What banks are is, they help institutional investors buy and sell securities, but when everything's going crazy in the market, those institutional investors step back, which reduces the commission that large, universal banks make from them.

Lapera: Yeah, everyone was kind of in a tizzy at the end of the first quarter of last year. I remember that. I was looking at the show notes from last year around this time, and I was like, "Oh, yeah, I remember." We actually got a listener question about what was going on and we answered it and everything. Times were different then, a whole year ago. But the point that you're making, Maxfield, I think, is that the hurdle, the bar, is low for these banks to succeed year over year, in terms of 2016's first quarter versus 2017's first quarter, right?

Maxfield: That's exactly right. Now, I don't want to be unfair, because JPMorgan Chase, even though, there was an easy comparison in terms of the comps this year compared to last year, it still had a really good quarter. Even in this really difficult and inhospitable environment for banks, it's earning a double-digit return on equity. So let's be fair; it had a good quarter. But it wasn't as amazing as it looks, based on those comps.