It's my favorite time(s) of year!
JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) kick off earnings season this morning but it's a very low bar set for the banks as they have all cut their profit forecasts in the last few weeks so expectations are low – especially as the 2nd quarter is usually weak for trading. Overall, the sector (XLF) is up 10% since early June and now we'll see if it's justified or not. Q1 results, which came out in late March, sent the sector off a cliff but they've climbed back since on the same fairy-dust that's powering the rest of the bubble.
- JPM missed, WFC missed and C beat but C reduced their loan-loss reserves from $12.3Bn to $12Bn, something banks can do "because they feel like it" and that effectively popped their bottom line by $300M. C's outstanding loans was up 2%, to $645Bn so the reduction in reserves is C telling us that they don't feel more than 1.86% of those loans will default while the industry standard is 2-2.5% or $12.9Bn – $16.1Bn so, effectively, C is goosing their bottom line by $900M-$4.1Bn by simply pretending their loans (student loans, sub-prime auto loans, retail store loans) are the safest in history!
- JPM dropped their loan-loss reserves to $1.22Bn from $1.4Bn, adding $178M to their "earnings" and, if that seems a little thin to you, consider that they did, in fact, write down $1.2Bn in loan defaults in Q2 and that covers just 0.56% of their portfolio, down from 0.79% in Q1.
- At least WFC is honest about it, saying "Net income increased $315 million, or 15 percent, from second quarter 2016, primarily due to the tax benefit in second quarter 2017 and lower loan loss provision" but, then again, it's kind of hard not to mention a $450M decrease in your loan loss reserves! For those of you keeping score, that is % of their earnings. WFC now has $11.073Bn provided for on $957.42Bn in loans or 1.15% – that'd double JPM's joke of a reserve but half of Citi's.