Big US banks have gotten earnings season off to a bumpy start with a spate of reports that missed expectations and highlighted growing unease about the economy.
In the last two days, JPMorgan Chase, Bank of America and Citigroup all reported disappointing earnings, floundering on weak trading revenues and, in some cases, large legal expenses, AFP reported.
Wall Street reacted bitterly to the results, punishing not only the banking sector, but the broader market. The S&P 500 Thursday closed below 2,000 for the first time in a month, falling for the fifth consecutive day.
The weak results from financial firms have quashed the momentum that pushed equity markets to record highs late last year.
“There was so much optimism after the fourth quarter that the worst was behind us,” said Chris Low, chief economist at FTN Financial.
“Nothing is worse for a stock than to think that you’re on an upward trajectory only to discover that you’re not and to realize that there’s still risk.”
The banking results also gave Wall Street an occasion to fixate on gloomy macroeconomic conditions that could batter the sector.
Deflation Risk
What would a wave of defaults in the oil sector mean for big banks? How would banks do if the Federal Reserve does not raise US interest rates in 2015?
“There’s a growing sense of deflation risk, even in the US,” said Low.
Low said this week’s plunge in treasury yields is a sign the market believes the Fed will not raise rates in 2015. Higher rates are a net positive for banks, he added.
Probes Continue
JPMorgan, the biggest US bank by assets, reported a 6.6 percent decline in fourth-quarter earnings from a year ago, to $4.9 billion, missing expectations due mainly to an unexpectedly large $990 million charge for legal expenses.
JPMorgan disclosed in November that it faced a criminal probe by the US Department of Justice over its foreign exchange trading business. The $990 million charge is another indication that the bank’s foreign exchange regulatory woes are far from over, analysts said.
Citigroup also faced questions about its legal exposure after a massive $3.5 billion charge for legal costs and corporate position resulted in an 86 percent drop in earnings to $350 million.
The big US bank, like its peers, suffered a large drop in trading revenues for its fixed income markets segment, which fell 15 percent to $2.0 billion.
At Bank of America, quarterly earnings fell 11.3 percent to $3.1 billion, missing expectations in part due to a fall in trading revenues.
BofA also faced concerns about its vulnerability to crashing oil prices.
The major exception was Wells Fargo, the country’s largest mortgage lender, which reported a 1.8 percent increase in earnings to $5.7 billion, meeting expectations behind a solid four percent gain in average loans to $849.4 billion.
