Earnings season for big banks has commenced, with JPMorgan Chase (JPM -0.30%) and Wells Fargo (WFC -1.55%) kicking things off with second-quarter results Tuesday morning. What hints do their performances offer for Bank of America (BAC -1.29%)? By my count, there are three.
1. Prepare for lower pre-tax earnings
Earnings before taxes were lower at both JPMorgan and Wells Fargo in the second quarter.
In JPMorgan's case, the primary culprit was a $866 million year-over-year decline in net revenue coupled with a $243 million increase in funds set aside for future loan losses. The nation's biggest bank by assets was able to offset much of this with a $931 million decrease in expenses.
Meanwhile, Wells Fargo saw its revenue rise by $252 million, or 1.2%, but this was outweighed by higher expenses and loan loss provisions.
The net result is that pre-tax earnings fell by 2.1% year over year at JPMorgan and by 1.2% at Wells Fargo -- although, in both cases, diluted earnings per share were buoyed by lower taxes and fewer shares outstanding.
While Bank of America could buck this trend, the fact that both JPMorgan (a global universal bank with both investment and commercial banking operations) and Wells Fargo (a largely domestic traditional lender) saw their pre-tax earnings fall doesn't bode well for the nation's second-biggest bank by assets.
2. Interest rates will continue to haunt B of A's bottom line
The Federal Reserve's decision to keep short-term interest rates historically low weighed on both JPMorgan and Wells Fargo.
JPMorgan saw its income from lending drop by $114 million, or 1.1%, on a year-over-year basis despite the fact that its portfolio of interest-earning assets expanded from just over $2 trillion last year to nearly $2.1 trillion this year. The decline stemmed from the fact that JPMorgan's assets earned only 2.44% on an annualized basis compared to 2.6% a year ago. If you normalize for this, JPMorgan's net interest income would have been $524 million higher.
Although Wells Fargo succeeded at growing its net interest income, it did so by adding $153 billion in assets to its balance sheet. Holding all else equal, if you normalize for the continued impact of low rates, the bank would have earned $700 million more last quarter before taxes than it actually did.
Investors should expect a similar result from Bank of America, though it's probably unlikely that B of A will be able to offset lower asset yields with a comparable increase in assets akin to Wells Fargo's. Thus it seems reasonable to assume that, excluding one-time impacts, Bank of America could see its revenue fall in line with JPMorgan's.
3. Investment banking revenues will be higher
Probably the single best line item from JPMorgan's earnings release came from its investment banking operations. Revenue from the division grew by 4.7% to $1.83 billion in the quarter compared to $1.75 billion last year.
JPMorgan pointed to higher advisory and debt underwriting fees to explain the improvement -- though lower trading revenue, likely caused by heightened volatility surrounding the events in Europe, offset the lion's share of the increase. Wells Fargo, which is far less involved in investment banking, saw a similar downward trend in trading revenue.
Bank of America stands to benefit from the same trend in advisory fees while simultaneously suffering from lower trading revenues. How these balance out is anybody's guess, but the fact that they don't move in unison offers additional support for the income-smoothing value of diversified business lines.
What analysts are expecting
Ultimately, aside from growth in Bank of America's earnings per diluted share, its biggest objective this quarter is to further chip away at its oppressive expense base. By doing so, the North Carolina-based bank could exceed analysts' estimates for $0.36 per share in quarterly earnings.
