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When Record Earnings Aren't Enough, Bank of America May Have an Opportunity

By Jessica Alling - Apr 12, 2013 at 11:00AM

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With investor reactions to two earnings releases putting pressure on banks to improve, B of A may be a step ahead.

Welcome to the first day of earnings season for the nation's banks. Though it doesn't report until next Wednesday, Bank of America (BAC 3.39%) is already feeling the pressure of expectations. But so far, the bottom lines haven't been the focus of investors this morning, even as B of A rivals report record earnings. It appears that investors have another focus entirely, leading the banking sector lower early in trading, with Bank of America opening 0.9% lower than yesterday's close and dropping 1.4% within minutes of the bell. The bank is moving its way back to breakeven, but it may have a fight ahead of it today.

'Tis the reason for the season
This morning, both JPMorgan Chase (JPM 3.31%) and Wells Fargo (WFC 3.55%) reported earnings before the bell. In what seems to be a recurring trend, both reported record profits that exceeded analyst expectations. But on the other hand, both missed revenue marks and reported other signs of weakening that has both analysts and investors concerned.

JPMorgan beat EPS estimates by a solid $0.20, with earnings of $1.59 per share from record earnings of $6.5 billion -- up 33% from the prior year quarter. Revenue was slightly off at $25.8 billion, dropping 3% year over year and missing analyst estimates by $0.07 billion. Likewise, Wells Fargo reported record earnings of $5.2 billion, with EPS of $0.92 per share beating estimates of $0.88 per share. The bank's earnings grew by 22% year over year.

Based on the reports from both Wells Fargo and JPMorgan, investors are concerned about the entire banking sector. Wells Fargo missed revenue estimates mainly because of a drop in new mortgage origination. On top of the loss in new loan business, JPMorgan CEO Jamie Dimon said that he expected the pressure on net interest margins to continue, which signals further revenue tightening.

Overarching concerns
In a marked change of attitude, investors are demanding quality over quantity from the banks, which will put added pressure on both Bank of America and Citigroup (C 7.56%), which reports its earnings on Monday. Since both banks have found themselves in need of serious rebuilding, it may give them a slight advantage over the two that have already announced earnings. Since JPMorgan and Wells Fargo came out of the financial crisis relatively unscathed, there hasn't been a lot of pressure to improve the quality of their businesses, while both B of A and Citi have had to get down to brass tacks.

When Citi and Bank of America report earnings next week, they may not reach the record levels of earnings seen in today's announcements, but keep an eye out for improved quality in the underlying businesses -- that will be the true test for how they are growing and gathering strength. 

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$51.05 (7.56%) $3.59
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$35.99 (3.39%) $1.18
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$122.18 (3.31%) $3.92
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$43.71 (3.55%) $1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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