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5 things to watch as banks report earnings

It’s once again time to take the temperature of two of Charlotte’s largest employers.

Wells Fargo kicks off bank earnings season this Friday with its second-quarter earnings report. Bank of America will follow suit Wednesday before the market opens.

Earnings reports are always a jumble of figures, charts and statements. But here are five things investors and Charlotte bankers will be paying attention to.

1 Will Wells Fargo’s record earnings streak continue?

It’s a figure that Wells executives love to tout: 13 quarters in a row of record earnings. The San Francisco bank, which employs about 20,500 in Charlotte, barely continued it in the first quarter by edging out the prior quarter by a single penny per share – and only by cutting costs more than revenue declined. The analysts’ consensus is that Wells will again best its previous record by 1 cent per share. The streak itself may be mostly a psychological thing, but failing to extend it Friday will mean a disappointing earnings report.

2 Will Bank of America announce another settlement?

The Charlotte bank’s last three earnings reports have all included significant legal settlements. In April, it was a $500 million agreement wiping out some liability on mortgage-backed securities stemming from its 2008 purchase of Countrywide. Before that it was $13 billion to Fannie Mae, the government-sponsored mortgage giant, and the federal government. And before that it was $2.4 billion to settle a shareholder suit over the bank’s 2009 acquisition of Merrill Lynch.

Bank of America hasn’t announced any major settlements ahead of its earnings report, so nothing earth-shattering on the legal front is likely. But nobody would be surprised to see another pocket of liability fall away. Much of the time, investors view a legal settlement favorably. One of the key issues holding back Bank of America’s stock price has been uncertainty on how much the bank might ultimately have to pay out. 

3 How has the bond market sell-off affected the banks?

Bond prices have fallen precipitously over the last few months as the economy has improved, interest rates have risen and the Federal Reserve indicates it might slow down on pouring money into the market. That’s affecting banks in a number of ways. First, banks hold massive bond portfolios, in the tens of billions of dollars. As prices fall, that could mean a hit on the banks’ capital levels just as regulators are taking a stricter stance and requiring them to hold bigger capital cushions.

But low interest rates have also crimped profits for the past several years since banks have had a hard time finding high-yielding places to park money – and higher rates could offer some relief. This earnings report should give a first glimpse of how Bank of America and Wells Fargo will deal with it all.

4 What will rising home prices do to the banks’ earnings?

By now you’ve heard that home prices are rising in Charlotte and across the country. Mortgage rates are going up, too. With Wells Fargo remaining the country’s top mortgage lender and servicer, anything in the housing market is going to have an impact on the bank.

Bank of America, too, is in the midst of a mortgage business model change from wanting to service as many mortgages as possible to focusing on offering them to core customers.

Analysts have long watched for a waning in the pace of refinancing, which appears to have begun. Increased home prices could also boost the value of foreclosed homes and mortgages still on the books.

5 How much farther has the ax fallen at Bank of America?

It’s been a steady drip-drip-drip of job cuts over the past two years as Bank of America works toward trimming 30,000 from its payroll. As it last stood, the bank had axed about 27,000 so far, bringing the companywide head count to about 263,000. News late last month that dozens of Charlotte bankers were laid off brought the issue home yet again. Investors care because they want to see the bank’s expenses come down. The 15,000 Bank of America employees here in Charlotte care about their jobs.

Dunn: 704-358-5235
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