The four largest U.S. banks have kicked off earnings season with a bang. In this Industry Focus: Financials clip, Michael Douglass and Matt Frankel give a rundown of the important numbers from the first quarter.
A full transcript follows the video.
This video was recorded on April 16, 2018.
Michael Douglass: Big bank earnings usually kick off earnings season, so that's usually an exciting beginning to earnings season, and there's quite a bit going on here. Let's start with the headline numbers, which generally were pretty strong completely across the board. All of the big four, that's Wells (NYSE:WFC), JPM (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), beat analyst expectations.
Matt Frankel: Yeah. It really seems that since the financial crisis, the banks are into under-promising and over-delivering. This is a trend we see, it's not always across the board, but it's usually a pretty good theme that the banks beat whatever analysts are calling for in terms of both earnings and revenue. In this quarter, it happened to be, all four of them beat on both the top and bottom lines.
We knew earnings were going to be higher than a year ago, like, JPMorgan's were 44% higher, Bank of America's were 38% higher. But, that was already in the analysts' estimates, and these banks still over delivered, due to a combination of a couple of things. First is solid growth. Most of the banks grew their loan portfolios and their deposit portfolios. The big exception is Wells Fargo, which we'll get to later on. And also because of expense management. Banks are, one, pushing expense reductions since the financial crisis as a way to boost returns and earn acceptable profits in the Dodd-Frank era, and also just because technology is advancing and it's making certain things cheaper for banks. For example, a deposit that you make through a mobile app costs the bank about one-tenth of what it costs if you go in and deposit it through a teller. So, thanks to these two areas, banks are doing pretty well right now.
Douglass: Yeah, and you see that really showing up in a couple of areas. One is expense management, not surprisingly. Longtime listeners have heard us harp on the efficiency ratio all kinds of times. JPMorgan's revenue was up $2.7 billion, expenses were up just $0.8 billion. So, that margin expansion meant that they had a 56% efficiency ratio. Bank of America was at a 60% efficiency ratio after dropping its non-interest expenses down about 1%. And Citigroup saw its efficiency ratio at 58%. And generally speaking, we're really, really thrilled if we see an efficiency ratio under 50%. But under 60% is pretty good. And what you've really seen is these trends playing out positively for the big banks. Plus, one of the important things to note is, that expanse management is not coming at the cost of growth. And that, to your point, Matt, that really highlights what technology and automation and some of these other things that they're really focusing on are driving for them. And JPMorgan saw a core loan growth of 8% and deposit growth of 6%. Bank of America had 3% deposit growth. Those are good numbers to see, especially when there's expense management going on.