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On Wednesday before the markets opened, three U.S. bank majors – JPMorgan Chase & Co. (JPM, Financial), Wells Fargo & Co. (WFC, Financial) and Goldman Sachs Group Inc. (GS, Financial) – reported earnings results for the first quarter of 2021.
All three banks blew past Wall Street's earnings expectations due to the strengthening economy and the release of some of the loan loss reserves that had previously been set aside for bad loans during the Covid-19 pandemic.
JPMorgan
For the first quarter, JPMorgan (JPM, Financial) reported revenue of $33.1 billion, representing a 14% year-over-year increase. Earnings per share came in at $4.50, or $3.31 on an adjusted basis (which also excludes the release of loan loss reserves), compared to adjusted earnings of 78 cents per share a year ago. Analysts had been predicting revenue of $30 billion and adjusted earnings of $3.10.
Due to continued low interest rates, net interest income slid 11% to $13 billion, with the net interest margin contracting to 1.69%. Total loans were up 1% compared to a year ago, while total deposits were up 36%. Banking revenue was $4.5 billion, up 70% year over year, while investment banking revenue was $2.9 billion, up $2 billion due primarily to higher income from fees. The overall return on equity was 23%.
In the first half of 2020, JPMorgan had set aside approximately $15.7 billion for loan losses. However, most of those losses never materialized. After releasing $5.2 billion of its loan loss reserves back onto its balance sheet during the first quarter, the bank has now reversed more than half of its Covid-19 loan loss reserves to date.
JPMorgan's CEO Jamie Dimon was optimistic about future economic growth on the earnings report, saying the economy "has the potential to have extremely robust, multiyear growth." However, he cautioned investors that the boost from the $5.2 billion in loan loss reserves would not last and that loan demand remained challenged, causing shares to drop nearly 2% to $151.21.
Wells Fargo
Wells Fargo (WFC, Financial)'s revenue for the quarter came in at $18.1 billion, while earnings were $1.05 per share on a GAAP basis and 71 cents on an adjusted basis. These numbers compared favorably to the revenue of $17.5 billion and adjusted earnings per share in from the year-ago quarter, and both also blew past Wall Street's expectations for $17.5 billion in revenue and 70 cents in adjusted earnings per share.
Unlike the other bank majors, Wells Fargo does not have a large capital markets or investment banking business. Net interest income fell 22% compared to the prior-year quarter. Noninterest income was up 45%, mostly due to the fact that things were so bad in the prior-year quarter – unlike the first quarter of 2020, the most recent quarter did not feature significant securities impairments or lower equity market valuations. Strength in mortgages also boosted results. Average loans shrank 9% and average deposits grew 4% (the company still faces restrictions to its balance sheet growth after the 2016 fake accounts scandal). The return on equity was 10.6%.
During the quarter, Wells Fargo also released $1.05 billion of its loan loss reserves, which further boosted the top line and GAAP earnings. Overall, the bank has cut its provision for credit losses by $5.10 billion in the past year.
CEO Charlie Scharf also noted the strength of the economy, and further commented, "Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter."
Shares gained more than 5% throughout the day's trading to close at $41.99.
Goldman Sachs
Goldman Sachs reported record results with revenue of $17.7 billion and diluted earnings of $18.60 per share, far above the prior-year quarter's revenue of $7.7 billion and diluted earnings of $3.11. Analysts had called for revenue of $12.6 billion and diluted earnings of $10.22.
Expectations were already high, but the investment bank managed to beat even the bullish consensus predictions due to business recovery, record issuance of special purpose acquisition companies and strong investment banking revenues. Investment banking revenue was $3.77 billion on strong equity underwriting, debt underwriting and financial advisory fees. The company once again ranked first in worldwide announced and completed mergers and acquisitions, worldwide equity and equity-related offerings and common stock offerings. The return on equity was 31%.
Compared to JPMorgan and Wells Fargo, Goldman Sachs' reduction in its provisions for credit losses was lower at only $70 million. However, this is reflective of its different structure as an investment bank rather than a provider of traditional banking services. The company's allowance for credit losses stood at a total of $4.24 billion as of the quarter's end, so $70 million was still a significant reduction.
"We have been working hard alongside our clients in preparation for a world beyond the pandemic and a more stable economic environment," CEO David Solomon said in the earnings release. Investors seemed optimistic that the company can continue its staggering results on continued economic recovery, bidding up shares more than 2% to $335.35.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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