Big Banks Report Mixed Results in Weak Earnings Season

Fewer U.S. companies than normal are beating analyst estimates in the early part of the fourth quarter earnings season.  Only 47.1 percent of companies in the Standard & Poor’s 500 Index (NYSEARCA:SPY) that posted results between December 1 and January 17 exceeded the average projection, according to Bloomberg.  Positive earning surprises have past the 50 percent mark at a comparable point in every other quarter for the past four years.  One sector that is proving to be a mixed bag of results for investors is the banking sector (NYSEARCA:XLF).

JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc. (NYSE:C) both reported disappointing earnings recently.  Last Friday, JPMorgan reported fourth quarter net income of $3.73 billion (90 cents per share), representing a 23 percent decline from the year earlier quarter.  Analysts were expecting 92 cents per share.  The bank has now seen net income fall in each of the last two quarters.  On Tuesday, Citigroup reported fourth quarter net income of $1.17 billion (38 cents per share), which is an 11 percent decline from the year earlier quarter.  Analysts were expecting 50 cents per share.  Citi’s earnings miss was described as “horrendous” by money manager Jeffrey Sica, of SICA Wealth Management, especially in the light of how much the estimates had already been downgraded by Wall Street.  Bank of America (NYSE:BAC) also reported an earnings miss, despite making $2.9 billion by selling its stake in China Construction Bank.

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Custodian banks such as State Street Corp. (NYSE:STT) and Northern Trust Corp. (NASDAQ:NTRS) are also struggling with earnings.  Although net income increased more than fourfold, State Street’s earnings of 76 cents per share fell short of the mean estimate of 94 cents.  Joseph L. Hooley, State Street’s chairman, president and chief executive officer, said, “Overall, 2011 was a very successful year amid extremely challenging market conditions. Revenue in the year was characterized by a strong first half followed by a weaker second half, the result of volatile markets and risk-averse investor behavior.”  Northern Trust also missed estimates and said it is cutting about 700 jobs worldwide.  Nearly half of the job cuts have already been made, mainly in Europe.

Despite the weak start to earnings season, Wells Fargo & Co. (NYSE:WFC) and US Bancorp (NYSE:USB) reported uplifting results this week.  Wells Fargo’s net income jumped 20.1 percent to $4.1 billion (73 cents per share).  Analysts were expecting earnings of 72 cents per share.  “I’m extremely pleased with Wells Fargo’s performance in 2011 – including strong deposit and loan growth, record cross-sell and record earnings,” said Chairman and CEO John Stumpf. “We achieved these results while completing the conversion of Wachovia’s retail banking stores – the largest such conversion in banking history – and now all of our 6,239 retail banking stores are on a single platform serving customers coast to coast.”  Meanwhile, net income for US Bancorp surged 38.6 percent to $1.35 billion (69 cents per share).  Analysts were only expecting earnings of 63 cents per share.  Goldman Sachs (NYSE:GS) also beat estimates, but reported a decline of 57.6 percent in net income on lots of cost cutting.

Looking forward, many expect the better-than-expected results from Wells Fargo and US Bancorp to continue.  The average estimate for Wells Fargo’s next quarter has edged up from 71 cents per share to 72 cents over the past sixty days.  The average estimate for US Bancorp has also moved higher, from 60 cents per share to 62 cents.  However, as volatility and euro concerns weigh on the financial markets, analysts are growing more cautious on banks such as JPMorgan and Citigroup.  Both companies have seen a decrease in earnings estimates.  The average estimates for JPMorgan in the next quarter have fallen from $1.28 per share to $1.15, while Citigroup’s estimates have decreased from $1.09 per share to $1.04.  Vikram Pandit, Citi’s Chief Executive Officer, said, “Clearly, the macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment.”

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com