Big Banks Impress in Q2 Earnings Despite Legal Costs - Analyst Blog

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Amid the tough industry backdrop and huge litigation settlements in second-quarter 2014, most of the banks reported last week succeeded in outpacing the earnings estimates with their cost-control measures and better-than-expected top-line growth. This trend has been particularly evident in the results of the banking behemoths.

Though legal costs drive down profitability, banks' operational efficiencies have reaped benefits. Moreover, a marginal improvement in credit trends has countered the negatives to some extent. (Read last week's developments: Bank Stock Roundup for Jul 14, 2014 )

Recap of the Week's Most Important Earnings:


1. Citigroup Inc. ( C ) reported impressive second-quarter 2014 results. Adjusted earnings per share came in at $1.24, outpacing the Zacks Consensus Estimate of $1.08. However, earnings were below the year-ago figure by a penny.

Notably, prior to the earnings release, Citigroup struck a deal with the U.S. Department of Justice (DOJ), several state attorneys general (State AGs) and the Federal Deposit Insurance Corporation (FDIC) worth $7 billion. Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA) along with charges worth $3.8 billion ($3.7 billion after-tax) related to the aforementioned deal, Citigroup reported net income of $181 million or 3 cents per share compared with $4.2 billion or $1.34 per share in the prior-year quarter. (Read more: Citigroup Reports Impressive Q2 Earnings, Includes $7B Settlement Impact )

2. Bank of America Corporation ( BAC ) delivered a positive earnings surprise of 41.4% for the second quarter. Also, the company reached a $650 million settlement with AIG to resolve its residential mortgage-backed securities (RMBS) litigation. The company came out with adjusted earnings per share of 41 cents, beating the Zacks Consensus Estimate of 29 cents. The number is also significantly higher than 32 cents earned in the prior-year quarter. Results exclude 22 cents a share (after tax) in litigation expenses. Considering this one-time item, the company has earned 19 cents per share. (Read more: BofA Beats Earnings on Huge Adjustment, $650M AIG Settlement )

3. JPMorgan Chase & Company ( JPM ) braved the tough industry backdrop and seasonal softness with its underlying strength and delivered a positive earnings surprise of 22.3% in the second quarter. The banking giant came out with earnings of $1.59 per share, beating the Zacks Consensus Estimate of $1.30. The number is also marginally less than $1.60 earned in the year- ago quarter. Results exclude an after-tax legal expense of 13 cents per share. Considering this one-time item, the company has earned $1.46 per share.      

In addition to seasonally soft trading volumes, there were legal costs and lower reserve release to drag the results, but top-line strength dominated. Also, its cost containment efforts were reflected in the non-interest expenses. (Read more: JPMorgan (JPM) Rebounds to Earnings Strength )

4. U.S. Bancorp ( USB ) reported an earnings surprise of 1.3%, which was primarily attributable to the company's strong top-line performance. The company's second-quarter 2014 earnings per share of 78 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, this compared favorably with 76 cents earned in the prior-year quarter. Higher revenues, a strong capital position, improving credit quality and growth in average loans and deposits were the positives for the quarter.

Notably, in the second quarter U.S. Bancorp reached a settlement with the U.S. Department of Justice (DOJ) worth $200 million resolving claims associated with origination of faulty mortgage loans insured by the Federal Housing Administration (FHA). Prior to this, the company sold 3.0 million shares of the Class B common stock of Visa Inc., which recorded a net pre-tax gain of $214 million. Therefore, the sale of Visa Class B shares neutralized the DOJ settlement charges, thereby not affecting earnings per share. (Read more: U.S. Bancorp Q2 Earnings Impress Investors on Organic Growth )

5. The PNC Financial Services Group, Inc. ( PNC ) reported an earnings surprise of 4.5%, which was primarily attributable to the company's cost-containment measures. The company's second-quarter 2014 earnings per share of $1.85 outpaced the Zacks Consensus Estimate of $1.77. However, this compared unfavorably with $1.98 earned in the prior-year quarter.

Better-than-expected results were primarily driven by decreases in both non-interest expenses and provision for credit losses. Further, an enhanced credit quality and healthy capital ratios were the positives. However, a lower top line was a concern. (Read more: PNC Financial's Q2 Earnings Outperform on Lower Expenses )

Price Performance

With efforts to minimize legal hassles, banking stocks showed an uptrend recently. However, the stocks were volatile following their earnings results.

Company

Last Week

Last 6 months

JPM

3.4%

1.5%

BAC

-0.5%

-8.8%

WFC

-0.1%

12.1%

C

2.4%

-5.1%

COF

-2.0%

14.6%

USB

-2.0%

2.9%

PNC

-3.7%

3.1%


In the last five trading sessions, JPMorgan and Citigroup were the major gainers, with their share prices gaining 3.4% and 2.4%, respectively. On the other hand, PNC Financial showed a decline of 3.7%.

Over the last 6 months, Capital One Financial Corporation ( COF ) and Wells Fargo & Company ( WFC ) were the top performers, with their shares advancing 14.6% and 12.1%, respectively. However, BofA and Citigroup witnessed an 8.8% and 5.1% price decline, respectively, over the same time frame.

What's Next in the Banking Universe?

Regions Financial Corporation ( RF ) with an Earnings ESP of +4.76% and a Zacks Rank #3 (Hold) is scheduled to report second-quarter 2014 earnings on Jul 22.

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JPMORGAN CHASE (JPM): Free Stock Analysis Report

REGIONS FINL CP (RF): Free Stock Analysis Report

PNC FINL SVC CP (PNC): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

US BANCORP (USB): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: CVA , DVA , RMBS , JPM , RF

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