After a tough fourth quarter, the nation’s biggest banks will reveal this week whether they managed a turnaround in the first three months of 2015.
First-quarter earnings season for the largest banks kicks off Tuesday, when Wells Fargo and JPMorgan Chase & Co. report their results. Charlotte’s Bank of America will release its earnings Wednesday.
Bank of America, JPMorgan Chase and Citigroup – three of the four largest U.S. banks – disappointed investors in the fourth quarter as they posted lower profits compared with the same period the year before. Only Wells Fargo posted higher earnings.
Here’s what to watch for when the latest quarterly numbers come out:
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1. How’s the mortgage business?
Big banks are major mortgage lenders and depend heavily on their home-lending operations. But their mortgage revenues have taken a big hit in recent years in large part because mortgage rates started rising in 2013, causing their refinancing business to decline.
Both Bank of America and Wells Fargo reported lower mortgage originations in the fourth quarter compared with the same quarter the year before. The figures they and other banks release this week will show whether they posted better mortgage results in the first three months of this year – the start of the typically busy spring homebuying season.
Bank of America and Wells Fargo have laid off thousands of mortgage workers nationwide in recent years as refinancing activity has waned and as fewer borrowers have fallen behind on mortgage payments, creating less need for employees who handle delinquent loans. Some of those layoffs have been in the Charlotte region.
Wells Fargo employs roughly 23,000 locally across various business lines, and Bank of America employs about 15,000.
With Wells Fargo being the nation’s biggest mortgage lender, CEO John Stumpf is likely to discuss the state of the U.S. housing market Tuesday, as he usually does when the lender releases its earnings each quarter. Mortgages are crucial to Wells’ fortunes with about 8 percent of its total revenues in 2014 coming from mortgage banking.
2. What’s the economy looking like?
The nation’s biggest banks can serve as a barometer for the health of the broader U.S. economy. During Bank of America’s fourth-quarter earnings call, CEO Brian Moynihan said the economy was improving, but he also described an “ongoing slow economic sluggishness.”
During Wells Fargo’s fourth-quarter earnings call, Stumpf said he was optimistic about progress the economy was making, but he also noted that the economy was not experiencing “breakout” growth. Stumpf said U.S. job gains as well as accelerated growth in gross domestic product were among signs of strength in the U.S. economy in 2014.
3. Will Bank of America’s legal costs go up or down?
Since the financial crisis, Bank of America has spent billions to resolve litigation, much of it stemming from its purchases of Countrywide Financial and Merrill Lynch. Those legal costs have weighed heavily on its earnings.
The lender said a $16.65 billion settlement it struck last year with the U.S. government over toxic mortgages resolved a significant portion of its outstanding mortgage-related legal matters. But investors continue to closely monitor the bank’s legal costs and will be paying attention to the latest legal figures disclosed in its earnings report.
Quarterly earnings reports are also where Bank of America, like other companies, tends to disclose any new legal challenges. So, the bank’s investors will be looking out for that, too.
4. Will Bank of America say anything about its latest ‘stress test’?
Bank of America surprised some analysts and investors last month when it disclosed that the Federal Reserve wants it to correct issues the regulator found at the bank during its annual “stress test.” The test is designed to determine the losses major banks might suffer in a hypothetical economic downturn.
The Fed said Bank of America would meet a range of minimum capital ratios under two hypothetical recession scenarios. And it gave the bank permission to repurchase $4 billion in common stock. But the regulator also told the bank it needed to fix “deficiencies” and “weaknesses” in its capital planning process – as well as resubmit its capital plan – by Sept. 30. Moynihan could face questions on the matter from analysts during the bank’s earnings conference call Wednesday.
5. Did their trading businesses improve?
A slump in trading business at Bank of America, JPMorgan and Citigroup contributed to the lower overall profits for those banks in the fourth quarter. Market volatility spiked in the fourth quarter, resulting in banks seeing lower demand for securities and commodities trading, among other things.
In its outlook for the first quarter, analysts at Keefe, Bruyette & Woods said they expect big banks to report improvements in their trading business. But the banks’ results will also reflect the challenges they still face growing profit margins at a time when interest rates remain low, KBW said.