Citigroup Inc (C), U.S. Bancorp (USB): A Weak Revenue Environment Is Not a Problem for These Banks

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Large cap banks might continue to face headwinds as far as their revenues are concerned due to sluggish growth in loans. However, I’ll focus on any signs of improvement and try to differentiate between the banks. I believe, given the revenue challenged environment, banks which are able to contain their expenses and grow their top lines with the help of loans growth are best positioned.

I believe Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and U.S. Bancorp (NYSE:USB) are best positioned for the current environment.

Citigroup Inc (NYSE:C)

Revenue trajectory

The revenue trajectory might remain disappointing for the rest of the 2013 as the environment still remains challenging for banks, particularly due to the sluggish growth in loans. Compared to the first quarter, you can expect the banks to report steady to slightly improving loan growth during the second quarter. To partially offset the pressure on the net interest margin, banks will focus on high-cost TruPS redemption, refinancing of debt, and incremental loan growth.

During the first quarter, Citigroup Inc (NYSE:C) reported best revenue growth (13% over the prior quarter). This is because it is considered more sensitive to the U.S. capital markets than its peers. Going forward, you can expect the bank to report sequentially higher revenue due to its prior quarter’s loan growth. The bank reported a 5% surge in its loans during the first quarter. These loans will generate higher return during the second quarter.

Other large banks, such as Wells Fargo & Co (NYSE:WFC) and U.S. Bancorp (NYSE:USB), experienced significant pressure on their revenues as their mortgage banking revenues plunged and their net interest rate margin contracted. U.S. Bancorp (NYSE:USB) reported a 4.7% sequential revenue plunge, while JPMorgan Chase & Co. (NYSE:JPM) reported a 6% increase in its top line at the end of the first quarter. The loans for JPMorgan Chase & Co. (NYSE:JPM) were up 5% year over year, while U.S. Bancorp (NYSE:USB) posted 5.8% growth over the same time frame. Higher loans will help the banks generate higher returns in the second quarter.

Poor mortgage banking results for everyone?

Wells Fargo & Co (NYSE:WFC) is considered the largest mortgage lender in the U.S. with a peak market share of 33%. However, during the first quarter of the current year, the bank experienced a decline in its mortgage origination volumes, while the gain on sale margins did not provide any support either.

Overall gain on sale margins fell 30% over the prior quarter. You should expect the banks to report further declines in the margins this quarter. A seasonal uptick is making some banks optimistic about their originations this quarter. Among these banks are JPMorgan Chase & Co. (NYSE:JPM), U.S. Bancorp (NYSE:USB), and Citigroup Inc (NYSE:C).

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