Both JP Morgan (JPM) and Wells Fargo (WFC) lapped earnings estimates Wednesday morning. Here are the pre-earnings predictions.
Wells Fargo Reported:
Strong business momentum continues:
- Year-to-date revenue up 11 percent.
- Average loans up 15 percent from prior year and 13 percent (annualized) from prior quarter.
- Average earning assets up 15 percent from prior year and 13 percent (annualized) from prior quarter.
- Core deposits up 10 percent from September 30, 2007, and 30 percent (annualized) from June 30, 2008.
- Cross-sell of 6.3 for wholesale customers and a record 5.7 for retail bank households.
- Credit reserve build of $500 million ($0.10 per share), bringing allowance for credit losses to $8.0 billion.
- Previously announced impairment charges for investments in Fannie Mae (FNM), Freddie Mac (FRE) and Lehman Brothers totaling $646 million ($0.13 per share).
- Revenue up five percent from prior year despite impact of investment write-downs.
- Tier 1 capital of 8.58 percent, up from 8.24 percent in second quarter 2008.
Regarding deposits:
“We saw a tremendous inflow of deposits in the latter part of the quarter, especially at the end of September reflecting what we believe is a significant flight to quality,” said Chief Financial Officer Howard Atkins. Core deposits increased $23.7 billion, or 30 percent (annualized), from June 30, 2008. Average core deposits of $320. 1 billion increased $13.9 billion, or five percent, from a year ago and $1.7 billion, or 2 percent (annualized), linked quarter. Average mortgage escrow deposits were $21.2 billion, down $1.2 billion from third quarter 2007 and down $1.5 billion linked quarter. Average retail core deposits increased $13.2 billion, or 6 percent, from third quarter 2007 and increased $3.8 billion, or 7 percent (annualized), linked quarter. Average consumer checking accounts grew a net 6.1 percent from second quarter 2007, with 8 percent growth in California, the largest increase in net new checking accounts in California in almost four years. Wealth Management group average core deposits of $22.7 billion increased $7.7 billion, or 52 percent, from third quarter 2007.
JP Morgan Reported:
- Acquired Washington Mutual’s (WM) banking operations on September 25.
- Significantly strengthened consumer franchise, with more than 5,400 branches.
- Results included estimated losses of $640 million (after-tax) for Washington Mutual merger-related items: $1.2 billion charge to conform loan loss reserves and a $581 million extraordinary gain.
- Reported net markdowns of $3.6 billion due to mortgage-related positions and leveraged lending exposures in the Investment Bank.
- Maintained #1 rankings for Global Investment Banking Fees and Global Debt, Equity & Equity-related volumes for the quarter and year to date.
- Grew revenue by 16% and increased branch production at Retail Financial Services.
- Achieved double-digit net income growth at both Commercial Banking and Treasury & Securities Services.
Reported the following significant after-tax items:
- $927 million benefit from reduced deferred tax liabilities.
- $642 million loss on Fannie Mae and Freddie Mac preferred securities.
- $248 million charge related to offer to repurchase auction-rate securities.
- Increased credit reserves by $1.3 billion firmwide to $15.3 billion, resulting in loan loss allowance coverage of 3.18% for consumer businesses and 2.11% for wholesale businesses, before Washington Mutual.
- Maintained strong Tier 1 Capital of $112 billion, or 8.9% (estimated); raised $11.5 billion of common equity during the quarter.
Regarding Deposits:
The number of checking accounts totaled 11.7 million, up 1.0 million, or 10%.
The number of average total deposits grew to $210.2 billion, up $4.9 billion, or 2%.
Now, this goes back to my post Tuesday on the TARP plan. Money is flowing into the surviving banks at an incredible rate. Those surviving all have strong Tier 1 ratios. The problem they all have is, growing loan losses. Growing loan losses will offset the effect of capital injection from the gov't. If you remove the bad loans, you get a double boost as incoming deposits are then augmented by loan loss reserves being decreased.
My concern and doubt is just how much this plan will actually increase lending. Until banks see loan losses ebb, the intended lending effect of the TARP plan will be muted at best.
Now, if Treasury follows this with the second tranche of the $700b being used for loan purchases, then you've got something as you both raise equity and lower loan losses. Until details are unveiled, I am skeptical.
Now that does not mean these banks will not make money. On the contrary, they are taking in deposits at rock bottom rates and still getting loan payments 4% to 5% higher. There are also fewer fish in the pond.
Morgan and Wells will do just fine. Just don't expect the TARP plan to do wonders for the rest of the economy.
Disclosure ("none" means no position):Long WFC, none.
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This article has 1 comment:
- thedozer
- 156 Comments
Oct 15 05:43 PMI still don't trust your balance sheets!
lets review this post and this article in 18 months after the CDS from Lehman Bro's busts 1/3 of the hedgefunds....
plus how can you value your assets properly when the government hasn't yet priced them!
More by Todd Sullivan