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Key Takeaways From Bank Earnings So Far


To appreciate what's ahead for JPMorgan, Wells Fargo, Citigroup, and the industry as a whole, it's critical to note the clues that now sit on firms' balance sheets.

MINYANVILLE ORIGINAL When I first started writing for Minyanville, I offered that to understand the financial services industry, one had to appreciate that earnings are the past and the balance sheet is the future.

As I reflect on the earnings reports from JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C) over the past several days, I was reminded of this thought. To appreciate what is ahead for the industry, it's imporant to remember that it's not what these firms reported this quarter that matters, but rather what clues now sit on their balance sheets.

Looking at Wells Fargo's quarter end balance sheet, two particular items stand out. First, I was struck by the bank's decision to hold $9.8 billion of its conforming first mortgage portfolio (1-4 family) of loans rather than sell outright. Beyond the fact that these loans more than represented the total net loan growth for the bank for the quarter, these are not assets that banks typically hold on to, given their duration and ease of sale in the secondary markets. Then again, it is very clear from Wells' release that net interest margin is under significant pressure. (On a linked quarter basis, net interest margin was down 25 bps, a particularly large decline for a bank of Wells' size.)

Time will tell whether this carry trade of whole mortgages funded by near costless deposits works out, but it screams to me: "I need net interest margin and I need it now!"

The second element of Wells' balance sheet that garnered my attention was the almost $2.9 billion of unrealized securities gains sitting in Other Comprehensive Income. While ultimately capital-neutral, these are earnings "acorns" available should Wells Fargo need them in the future. With mortgage refis booming in the third quarter, Wells Fargo clearly didn't need more non-interest revenue or earnings, but it will be interesting to see how the bank uses these acorns in future quarters should mortgage banking revenues decline.

Regarding Citigroup, I was struck, albeit not surprised (as the figures had been well-preannounced) by the write-downs associated with the sale of Smith Barney to Morgan Stanley (NYSE:MS). While the analyst community yet again shrugged off the charges as "non-case/non-recurring," I have to believe that pressure is mounting at the FASB regarding goodwill and whether or not companies should write off/amortize these intangible assets when they purchase businesses at a premium to book value.

From my perspective, the costless nature of acquisition accounting induced companies of all kinds, not just financial services firms, to acquire rather than organically build businesses. And not surprisingly, with stock prices soaring, firms took full advantage of this at the peak (2000-2007).
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Position in SH and JPM
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