1. The Retail Banking revenue was flat q/q and y/y as the re-pricing of higher rate deposit accounts and increased debit card income was offset by lower deposit related fees, time deposit balances and investment sale revenues. There is probably nothing to worry here, but in larger scheme of things a truly robust and improving economy should see rising banks' deposit base. But that was not clearly evident in JP Morgan's earnings. I don't see how Bank of America, which has the largest consumer business segment of any banks, would be any better than JP Morgan.
2. Consumer Banking sector was negatively affected by higher credit costs of $4 billion which includes an increase of $1.5 billion in loan loss reserves. Again, at least in the mindset of investors, JP Morgan is supposed to be the best of breed, yet there is still no end in sight when it comes to increasing loan loss reserves. Two years ago, an increase of $1.5 billion in loan loss reserve would have sent investors to the exit doors in a panic. But we have become accustomed to that. To add more fuel to fire, here is current thinking by Credit Suisse:
"Going forward, production and run-offs in the Home Lending Portfolio could result in a 10-15% decline (or estimated $240 billion in 2010 and $200 billion in 2011) which would reduce 2010 net income by approx $1 billion. Our 2010 forecast contemplates mortgage revenues down by 20%."
No matter how you try to milk this, it does not portray good for Bank of America, which also has the largest home loan portfolio through its acquisition of Countrywide.
3. Total Investment Banking business revenue was down 34% q/q. Specifically, lower revenues were attributable to a q/q decline in fixed income which went from $5 billion in 3Q09 to just $2.7 billion in 4Q09 due to lower volume and tighter spreads. It is important to note that 40% of all Goldman Sachs revenue comes from fixed income trading. If JPM had such a bad quarter, there is no reason to assume Goldman was simply eating JP Morgan's lunch. I would argue that it was industry wide as spreads across all products have in fact tightened. This does not bode well for Goldman and hence the reason why Meredith Whitney has been busy taking down estimates for Goldman for last several weeks.
The bottom line is JP Morgan managed to beat expectations when it reported earnings on Friday despite lower revenue. And it did so on sharply lower manageable operating expenses. If I take a page out of JP Morgan's earnings, I see Goldman's results will be soft due to sluggish Investment Banking, and Bank of America's earnings will be soft due to shrinking balance sheet, still deteriorating home loan portfolio and poor Consumer Banking business. The shrinking of balance sheet to me is most concerning. This should not be the case if there was true underlying improvement in the economy.
In my mind, the banking sector is the back bone of our economy. Leaving aside short term and temporary discrepancies in pricing in the market, in general the market just cannot rally without help from the banking sector. Given the plethora of banks' earnings coming out this week, I expect mediocre to slightly bearish results at best. And with this stance, I'll be presenting my trades for certain bank stocks going into their earnings.
