Q3 Bank Earnings Preview

JPM will kick off earnings season for financials tomorrow, and the whispers seem to be that the quarter is going to be pretty good.  Hopefully JPM will show signs that the banking system is continuing to heal and that profitability is returning.  Whereas a couple of years ago investors would have had a laser like focus on capital and asset quality metrics, this quarter the metrics that I'll be paying close attention to are (among others): Return on Equity, Loan Growth and NIM.  Below are charts of how these have trended for the banking system over the last decade.

While asset quality has gotten a lot better for the aggregate portfolios and charge offs have slowed to pre-recession levels, banks are still holding a lot of non-accrual assets in their residential books.  It will be important to see if the system is taking the opportunity provided by improving housing prices to finally clean their books completely.  This will have major implications for future lending.

What Percent of Bank Holding Company Assets are Held at Commercial Bank Subsidiaries?

The New York Fed is putting together a new banking industry report which can be found here.  It's not as comprehensive as the one that the FDIC puts together on a quarterly basis, but it is valuable in that it goes beyond just the commercial bank subsidiary and looks at the whole bank holding company.  As the following chart shows, less than 80% of assets consolidated on an average Hold Co's balance sheet are held in the commercial bank.  Some other interesting data on BHCs is also below including geographic exposure of systemic assets (i.e. to Europe).

WFC 2Q12 Conference Call Highlights

Quotes from 2Q12 WFC Earnings Call

• organic growth in both commercial and consumer portfolios.

• average core deposits up $10.1 billion from the first quarter, up $73.2 billion or 9% from a year ago. 

• net interest margin was unchanged at 3.91%

• established an efficiency ratio target of 55% to 59%

• charge-offs were...1.15% of average loans, down...$3.2 billion or 59% [from 4Q09 peak].

• Nonperforming assets were down $1.8 billion from the first quarter, down 11% from a year ago. NPAs were 3.21% of total loans in the second quarter, the lowest level since 2009.

• Our estimated Tier 1 common equity ratio under the latest Basel III...7.78% for the second quarter

• Return on assets was 1.41%, the highest in 16 quarters and within our target range of 1.3% to 1.6% that we provided on Investor Day. Our ROE grew to 12.86%, also within our target range of 12% to 15%

• I think the market continues to provide opportunities for firms that have the liquidity and the capital to [make acquisitions]. Whether or not we'll be successful, I certainly can't promise you because we turn down more than we pursue.

• We're not taking any significant duration risk or any significant credit risk [in the securities portfolio]. This is still a very high-quality portfolio and the duration is relatively short.

• Random quote from Stumpf that typifies WFC culture: But, Mike, we will not stretch for something. If -- I mean, that we -- it's just not in our culture to do that. So if we happen to have something that goes down one quarter, that's life.