JPMorgan, Wells Fargo, Citi stocks drop despite robust first-quarter earnings

By Steve Gelsi and Ciara Linnane

Analysts are recalibrating their outlook for the year on expectations of higher-for-longer interest rates

While JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. topped Wall Street estimates for earnings per share and revenue on Friday, stocks of all three megabanks fell into the red.

After outperforming the sector and the broader equity market for at least a year, JPMorgan (JPM) led losses among the big-bank stocks with a drop of 5.6%. Citigroup fell 0.8% (C) and Wells Fargo (WFC) dipped 0.3%.

Prior to Friday's trading, JPMorgan's stock was up by 14.9% in 2024, outpacing the 9% rise by the S&P 500 and a 2% gain by the Dow Jones Industrial Average.

Matt Stucky, chief portfolio manager for equities at Northwestern Mutual Wealth Management Co., said JPMorgan's flat guidance on net interest income of $90 billion for 2024 tracks slightly below the implied total of $92 billion based on the bank's first-quarter results.

"JPMorgan has been the shining star, and this is a little bit of profit-taking," he said.

Overall, the bank turned in a mostly "clean" quarter, but with the stock trading at a much higher multiple than its peers of two times tangible book value, investors saw little reason to jump further in at the moment.

"The bar is higher [at JPMorgan] in terms of what investors are used to seeing," Stucky said.

Brian Mulberry, client portfolio manager at Zacks Investment Management, said the downward move in bank stocks reflects doubts about the direction of interest rates for the rest of the year. Inflation readings this week have cemented the view that rates will remain higher for longer, with some experts even forecasting that the Federal Reserve will raise rates one more time.

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"Future earnings are being repriced under the realization that interest rates will be held at current levels likely until late in the year," Mulberry said. "This changes some of the prior forecasting that included more robust banking demand from consumers and commercial customers as the cost of capital comes down, and that does not appear to be likely."

Higher-for-longer interest rates are eating into JPMorgan's prospects for investment banking, he said.

"The promise of more investment-banking activity is waning," Mulberry said.

Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and Bank of America Corp. (BAC) are scheduled to report first-quarter earnings on Tuesday.

JPMorgan profit blasts past estimate and bank looks past latest inflation reading

JPMorgan Chase said its first-quarter net income climbed 6% as the megabank benefited from higher interest rates and increased credit-card balances, which were partly offset by lower margins on its deposits.

The bank said its profit for the three months that ended March 31 grew to $13.42 billion, or $4.44 a share, from $12.62 billion, or $4.10 a share, in the year-ago quarter.

Excluding a $725 million special assessment from the Federal Deposit Insurance Corp., JPMorgan earned $4.63 a share, topping the FactSet consensus estimate of $4.17 a share.

Revenue increased to $41.93 billion from $38.35 billion in the year-ago quarter and was also ahead of the consensus for revenue of $41.69 billion.

The bank's core pre-provision net revenue fell short of the estimate by KBW analyst David Konrad, according to a Friday research note on the bank's earnings.

Konrad said the bank missed his forecast for PPNR by a penny per share, driven by lower-than-expected net interest income of $23.3 billion, short of his estimate of $23.7 billion.

Lower fees and expenses offset the shortfall in net interest income, he said.

The bank's outlook for 2024 net interest income excluding markets increased by $1 billion to $89 billion, "which may fall short of market expectations, creating weakness in the shares," Konrad said.

PPNR is a banking figure that reflects net interest income plus noninterest income, minus noninterest expense.

JPMorgan Chase Chief Executive Jamie Dimon said the bank turned in a strong first quarter, while reiterating cautiousness about the economy.

"Many economic indicators continue to be favorable," Dimon said. "However, looking ahead, we remain alert to a number of significant uncertain forces."

Those include "terrible wars and violence" and growing geopolitical tensions, as well as "persistent inflationary pressures."

In addition, the effects of rapid interest-rate hikes by the U.S. Federal Reserve and other central-bank policies remain unknown because "we have never truly experienced the full effect of quantitative tightening on this scale," he said.

Dimon said he's preparing the bank for a "wide range of potential environments to ensure that we can consistently be there for clients."

Earlier this week, Dimon warnedthat the U.S. could see interest rates as high as 8%.

Dimon said the hot consumer-price index reading for March that came out earlier this week didn't change his broader view on the economy. Dimon doesn't focus as much on monthly numbers and instead continues to plan for a range of outcomes.

"We prepare for everything all the time," Chief Financial Officer Jeremy Barnum said.

During a conference call with journalists, Dimon said the "bottom 50%" of consumers have lower confidence in the economy.

Some consumers on the low end are substituting more affordable products for higher-cost items, he said, and added that the bank has noticed "some cracks" in the subprime car-loan market.

Overall, the consumer remains strong, with equity in homes and higher stock prices signaling that people are in "pretty good shape," Dimon said.

While JPMorgan Chase continues to hold capital on its balance sheet, Dimon said the bank doesn't plan to boost stock buybacks from the current level of $2 billion per quarter if proposed capital requirements under the Basel III endgame proposal get pared back.

If that happens, Dimon estimated it would free up about $20 billion in capital.

"I personally do not want to buy back a lot more than that at these current prices," he said. "What you might see [is] us do things in the short run that would increase our earnings."

JPMorgan Chase expects 2024 net interest income to be $89 billion for the year, excluding markets, up from its $88 billion estimate three months ago. Its guidance for total NII remained flat at $90 billion.

In the first quarter, NII rose 11% to $23.2 billion, ahead of the $22.76 billion FactSet consensus estimate.

First-quarter NII excluding markets declined 2% from the fourth quarter, however, "due to deposit margin compression and lower deposit balances," the company said.

NII is the profit the bank makes from loans after paying out interest to customers for its deposits.

CFO Barnum said the bank's office-real-estate portfolio has not shown any significant change either on the negative or the positive side, as more people work from home.

"There's been no meaningful improvement," but it's not getting any worse, Barnum said.

The bank has already built up its reserves for potential loan losses in office real estate and didn't see a need in the first quarter to increase the amount of dollars it set aside, he said.

JPMorgan Chase also manages a large portfolio of loans to the multifamily segment, but the bank's "very prudent" underwriting policies have protected its performance in the space, Barnum said.

Citigroup completes 'simplification,' but it's not done with layoffs

Citigroup posted better-than-expected first-quarter net income of $3.4 billion, or $1.58 a share, for the quarter, down from $4.6 billion, or $2.19 a share, in the year-earlier period.

Revenue fell 2% to $21.1 billion

The numbers were comfortably ahead of the FactSet consensus estimate for EPS of $1.18 a share and revenue of $20.46 billion.

Citigroup's NII rose 4% to $2.723 billion, while noninterest income rose 9% to $793 million.

The bank's cost of credit rose to $2.4 billion in the first quarter from $2.0 billion a year ago, driven by higher net credit-card losses. The company raised its total allowance for credit losses to about $21.8 billion at quarter-end from $19.8 billion a year ago.

Loans were up 3% at $675 billion at quarter-end, while deposits were down 2% at about $1.3 trillion.

Citi Chief Executive Jane Fraser said the company last month completed the organizational "simplification" that it announced in September.

"The result is a cleaner, simpler management structure that fully aligns to and facilitates our strategy," Fraser said in prepared remarks to accompany the first-quarter earnings report.

"It will also help us execute our transformation, progress as we retire multiple legacy platforms, streamline end-to-end processes, and strengthen our risk and control environment," Fraser said.

The bank benefited in the first quarter from a recovery in markets from a tough fourth quarter, with strong client activity in equities and spread products, she added.

Near-record levels of investment-grade bond issuance helped boost bank revenue by 49%. In wealth management, the bank grew fees and gathered more than $22 billion in net new assets over the last 12 months.

Northwestern Mutual analyst Stucky said Citi continues to trade at a discount to its peers even, with a surge in its stock price in 2024.

"Investors are more excited about Citi getting its businesses up to par," he said. "This implies upside for Citi's profit. For years and years, they've had substandard profitability and execution, and that's been translated to a very discounted valuation. There's also optimism that the management team is pretty serious about cost cutting."

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04-12-24 1252ET

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