You’d be excused for thinking that the nation’s first and fourth largest banks by assets, JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), reported horrible first-quarter earnings of Friday.
Here’s a headline from The Wall Street Journal: “J.P. Morgan, Wells Fargo Struggle.” This one’s from DealBook: “Fewer Home Loans Start to Affect Banks.” And here’s my favorite from Reuters: “JPMorgan’s lukewarm results put Dimon under more pressure.”
The general tenor of the articles is the same. To quote Reuters, “The top U.S. bank by assets reported tepid first-quarter results on Friday. Income in its biggest businesses — investment banking and consumer lending — fell, excluding accounting adjustments. Outstanding loans grew by just 1 percent, and profit margins on lending narrowed. Stock and bond trading revenue fell.”
Yet the numbers appear to tell a different story. For example, look at the banks’ first-quarter earnings per share.
Both reported massive EPS growth on a year-over-year basis. Wells Fargo & Co (NYSE:WFC) earned $0.92 per share, equating to a 23% increase. And JPMorgan Chase & Co. (NYSE:JPM)’s first-quarter EPS of $1.59 translates into a 33% gain. Indeed, from a profit perspective, it was the best quarter that either bank has ever recorded.
The counterargument is that the devil is in the details. In JPMorgan’s case, the nation’s largest bank by assets benefited to the tune of $1.15 billion from lower loan loss provisions. And in Wells Fargo’s case, its net interest income continued to decline, contributing to a drop in total revenue, and its mortgage origination volume waned.
For long-term investors, however, these concerns are much ado about nothing. There’s simply no question that lower loan loss provisions are a good thing. Did they juice JPMorgan Chase & Co. (NYSE:JPM)’s earnings? Sure, if that’s what you want to call it. But banks provision different amounts every quarter. What matters, in other words, is the trend. And a downward trend is unequivocally preferable to an upward one.
The concerns about net interest income are also short-sighted. We’re in a low-interest-rate environment. That’s the reality we live in. And that’s bound to continue. Until the unemployment rate decreases considerably or inflation starts to pick up, the Federal Reserve won’t abandon its current policies. Investors simply have to take this as it is. In fact, I’d be more concerned about a bank that’s increasing its net interest margin, as that would suggest to me that it’s stretching for yield irrespective of risk.