The Good, the Bad and the Ugly in Second-Quarter Results

Revenue Divide

It was a tough revenue quarter among the bigger banks that have reported so far, with Bank of America (minus-7%), Citigroup (minus-10%) and PNC Financial Services Group (minus-2%) reporting declines year over year. It was no coincidence that the banks that reported revenue gains like U.S. Bancorp (8%), First Horizon National (8%) and Wells Fargo (4%) were buoyed by strong showings in fee-income segments such as service charges on deposit accounts, card fees and fixed income. Wells Fargo managed its 4% increase in fee income despite a 17% drop in mortgage fee income.

Margin Squeeze

It's hard to deliver on revenue growth when rates are stuck at historic lows. U.S. Bancorp's Richard Davis compared it with struggling to keep your chin above a chin-up bar.

"Our knuckles are white, but we're still hanging in there," Davis said during an earnings conference call.

Most big banks reported narrower net interest margins, showing the increasing difficulty of generating revenue from loans. Bank of America reported the sharpest decline, as its margin shrunk 34 basis points, to 2.03%. Wells Fargo and Citigroup reported declines of 11 and 9 basis points, respectively.

Large regional banks including U.S. Bancorp and PNC held relatively steady.

Meanwhile, JPMorgan Chase said its margin expanded 16 basis points, to 2.25%.

Never-Ending Cost Cuts

Expense-cutting was the name of the game at Bank of America and Citigroup, which each saw noninterest expenses fall about 5%, and JPMorgan, which trimmed spending 6% thanks to lower legal fees and retail cost-cutting initiatives that on the whole favor investments in mobile over branches. The cutting is far from over at Bank of America, which plans to keep chopping expenses to meet its goal of a yearly budget of $53 billion by 2018.

U.S. Bancorp (12% increase) and Wells Fargo (4% increase) went the wrong direction, with each seeing increases in labor-related costs and spending on outside professional services. U.S. Bancorp also is investing in a major marking campaign. Deposit assessments rose 15% at Wells, and JPMorgan and U.S. Bancorp warned that new increases in federal deposit insurance premiums will drive up their overall expenses in the second half of the year.

Harnessing Energy Risk

Here's a bright spot (maybe). Credit problems tied to energy haven't disappeared, but the panic has subsided. Crude oil prices at around $45.50 a barrel have had a calming effect.

JPMorgan boosted its provision for credit losses by 50%, to $1.4 billion, but it said the higher reserves reflected the downgrade of one borrower.

The oil and gas sector "remains stressed," but "the overall trends have been somewhat positive with oil prices continuing to stabilize," Chief Financial Officer Marianne Lake said. "In addition outside of energy, we still have not seen contagion or deterioration in our wholesale or consumer portfolios."

Wells Fargo acknowledged that net chargeoffs and nonaccrual loans in its oil and gas loan portfolio rose, but its $150 million provision for loan losses was primarily for auto and credit card portfolios and not energy. Meanwhile, credit exposure fell 9.5% year over year to $39.1 billion primarily on a reduction in unfunded commitments.

"And as in every challenging cycle, we're also seeing opportunities, and we originated new loans during the second quarter to well-qualified borrowers," CFO John Shrewsberry said.

However, whether the respite will last is unclear as regional and midsize banks that have bigger chunks of their credit portfolios linked to energy borrowers still have to report quarterly results.

Confronting Brexit Fears

And there's plenty of new stuff to worry about. Bank CEOs tried to allay concerns about the U.K.'s decision to leave the European Union, which sent shockwaves through the financial markets.

U.S. Bancorp's Richard Davis said that the vote could be a boon to its payments unit. The Minneapolis bank has expanded its merchant-acquiring business across Europe in recent years, with a focus on hotels and airlines. The decline in the value of the pound could make vacations to London relatively cheap and that could result in higher revenue for the bank, Davis said.

Wells Fargo said the decline in mortgage rates following the June 23 Brexit vote has led to a surge in refinancing activity.

And JPMorgan Chase put on a good face. The company which has 16,000 employees in the U.K., far more than many competitors said it will simply take time to sort out the impact of Brexit on its EU operations.

"The truth of the matter is it's very, very early days," Lake said.

Too Many (CR)Eggs in One Basket?

Also in the worrisome department Big banks are ramping up loan production to drive revenue. Many have expanded their commercial real estate portfolios despite warnings from regulators about growing risks.

JPMorgan said last week that it grew its CRE book by 18% a rate that one analyst described as "growing like a weed."

"It's growing like a sunflower," JPMorgan's Lake said in response, pointing to the "really good" credit quality in the portfolio. The company increased total loans at a slower clip of 10%.

Other big banks followed suit. U.S. Bancorp reported an uptick in CRE lending, driven by demand in San Francisco and other cities along the West Coast. It had previously indicated that it planned to scale back.

Meanwhile, Bank of America and Wells Fargo both expanded their CRE books by about 10%.