NEW YORK – Banking shares were under pressure Thursday as investors closely examined JPMorgan Chase & Co.'s quarterly earnings for any cracks in the positive headlines, and as investors remained concerned about macroeconomic conditions.
Also weighing on the sector was continued uncertainty about financial regulation currently making its way through the Congress. A procedural vote began at 11 a.m. EDT.
JPMorgan generated stronger results than expected in its second quarter as the nation's second-largest bank by assets continued its recovery from sour loans. The bank improved net income in every line of business except investment banking, helped by a 23% reduction in reserves for loans unlikely to be paid back.
Still, JPMorgan shares recently fell 1.8% to $39.60, giving back some of their 10% gains since the second quarter ended.
The bank continues to shrink its assets as loans - including bad ones - roll faster off its balance sheet than it can make new ones. Also, investors could be concerned about declining revenue. Investment-banking revenue decreased 13% in the quarter and revenue on a managed basis, which excludes the impact of credit-card securitizations and is on a tax-equivalent basis, fell 7.6%.
In addition, Chief Executive Jamie Dimon poured his trademark cold water over any enthusiasm about the recovery in credit. In a press release, he said losses from bad consumer loans "remain at extremely high levels and therefore returns in our consumer-lending businesses are still unacceptable. As a result, these businesses did not meet expectations nor generate satisfactory returns on capital for our shareholders. It is too early to say how much improvement we will see from here."
Christopher Whalen, an analyst with Institutional Risk Analytics said the "overall tenor of [the] report is negative despite upbeat headline." He said investors still have worries about revenue, provision and leverage.
Sandler O'Neill analyst Jeff Harte said Thursday's stock weakness likely was due to "buy the rumor, sell the news" as JPMorgan's results largely were better than expected.
"Speculation was credit would be pretty good, and it was," Harte said, though he said the company indicated credit improvements were stabilizing as opposed to continuing getting better. He also said investors could have some concerns about the bank's revenue, though he doesn't believe they were that bad.
Also declining were shares of Bank of America Corp., down 3.3% to $15.16, and Citigroup Inc., down 2.9% to $4.09. Both companies are set to report earnings Friday, and analysts are expecting largely positive results based on JPMorgan's strong performance Thursday.
"JPMorgan's results indicate from a big picture standpoint that positive trends in the credit cycle are alive and well," Raymond James analyst Anthony Polini said. But he added results also showed that "the economic recovery is still on soft footing primarily due to a still very weak level of economic activity."
In broader economic news Thursday, investors sifted through a number of economic reports released before markets opened, including data that showed weekly jobless claims fell by 29,000 to their lowest level since August 2008. Claims lasting more than one week jumped.
Producer prices, however, fell for a third straight month in June, hurt by falling food and energy costs, though core prices remained tame. New York area manufacturing activity expanded at a slower-than-expected pace in July, according to a survey from the Federal Reserve Bank of New York.
Meanwhile, Goldman Sachs Group Inc. shares slipped 40 cents to $138.66 after trading higher early in the session on a Wall Street Journal report that the bank and the Security and Exchange Commission recently held discussions about a possible settlement to simultaneously resolve the fraud lawsuit against Goldman and some of the agency's lower-profile probes of the Wall Street firm's mortgage department.
The news wasn't enough to bolster the shares in a generally weaker market. Other financial stocks trading lower included Wells Fargo & Co., down 1.8% to $27.15, and Morgan Stanley, down 2.2% to $24.97.
Regional banks also declined, with SunTrust Banks Inc. falling 3.5% to $24.56 and Regions Financial Corp. dropping 3.6% to $6.89.