Hopes of a Washington deal and decent-looking earnings reports from J.P. Morgan (JPM) and Wells Fargo (WFC) provide the backdrop for today’s trading action. The extent of the follow-through from Thursday’s massive rally will depend on further details of the emerging DC deal.
The expectation appears to be that the debt-ceiling issue gets taken off the table through a six-week extension, giving the parties enough space to negotiate the rest of the budget issues while the government remains shutdown. This isn’t a perfect a solution, but it’s better than the logjam we were facing a couple of days back.
On the earnings front, you are justified in being surprised at the market’s positive reaction, in the pre-open at least, to J.P. Morgan’s big bath that wiped out its quarterly earnings, and then some. The bank has lately been infected with the disease that Bank of America (BAC) has been suffering from for a while – regulatory and litigation disease. They set aside more than $9 billion to meet contingencies related to its ongoing legal troubles, hoping that this would be the end of it.
Excluding the massive charge, J.P. Morgan’s 17 cents per share loss becomes a better than expected EPS of $1.47 vs. the Zacks Consensus Estimate of $1.28 and $1.40 in the same period last year. Strength in the bank’s commercial and investment banking operations appears to have driven the positive surprise. Importantly, the litigation charge is unlikely to damage the bank’s strong balance sheet, with capital ratios comfortably above mandated levels.
Wells Fargo also came out with results and while the bank managed to modestly beat on EPS, it came just short on the top-line. The bottom line result for Wells is impressive, but investors may find it less convincing as it came largely from expense management and reserve releases. In the core business, the mortgage business struggled as expected with originations down big, net interest margin under pressure and anemic loan growth.
We get into the heart of the Q3 earnings season next week, with the rest of the Finance sector and many other companies reporting results. The JPM and WFC results give us a good preview of what to expect from other banks. Net interest margins are under pressure, the mortgage business is in decline, capital markets were at best ok, and we are unlikely to see much improvement in demand for loans. To varying degrees, we will hear about these trends in the results from Citigroup (C), Bank of America, Goldman Sachs (GS) and others next week.
Let’s hope that we are past the Washington gridlock come Monday morning, enabling us to evaluate the Q3 earnings without any distractions.
