Midquarter Checkup: What Banks Have to Fix in Coming Weeks

May 20, 2014 7:30 AM

The second quarter is more than halfway over, making it a good time to identify the pressures mounting on banks and where they need to show improvement by their next earnings reports.

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End of the Streak?

Wells Fargo (WFC) has posted an impressive 12 consecutive quarters of record earnings per share. But its first-quarter results relied on certain one-time items, which led Barclays analyst Jason Goldberg to question whether the company's earnings streak is in jeopardy in the second quarter. The San Francisco bank is looking to grow revenue partly by building its credit-card business, which historically has largely been an afterthought. Last week Wells unveiled two new credit cards as part of its partnership with American Express.

(Image: Bloomberg News)

Taking It from All Sides

JPMorgan Chase(JPM) has a lot of gaps to cover. It has warned of a 20% drop in fixed-income and equities trading in the second quarter. It was already dealing with a huge drop-off in its mortgage business, as single-family originations fell 68% in the first quarter and it had to cut 3,000 mortgage-related jobs. Meanwhile, the bank's executive bench thinned further after Mike Cavanagh, a candidate to succeed CEO Jamie Dimon, left for another job.

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A Capital Headache

Bank of America (BAC) Chief Executive Brian Moynihan might have to endure a second-quarter conference call that goes much like his recent annual meeting: lots of questions about B of A's $4 billion mistake in its capital plan. Analysts will expect details about the fixes, the impact on dividends and buybacks and updates on the bank's pledges to hold people accountable. But the timing may be tricky because the revisions are due May 27, and regulators have 75 days to respond.

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Opportunity Cost

Citigroup (NYSE:C) needs to focus its money and attention on revamping its branch network and offsetting mortgage and bond trading declines, but instead it is fixing the shortcomings in its capital-planning operations and facing hundreds of millions of dollars in loan losses and regulatory probes tied to its Mexican unit. Questions are being raised about CEO Michael Corbat's internal controls and the rapidness of his responses. Contrarian investor Kevin Holt recently told Fortune that Citigroup stock is a good long-term play, but not every investor will be that patient.

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Card Giants Gird for Risk-Taking

The U.S. credit card industry remains mired in its post-crisis holding pattern. Card issuers continue to compete for customers at the top of the credit spectrum, and consumer delinquency rates are still near historic lows. But some of the large credit card companies are preparing for the day when a higher level of risk returns. In the first quarter, both Discover Financial Services (DFS) and American Express (AXP) increased their loss provisions.

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Reaching the Choke Point

Questions are multiplying about the year-long clash over the proper role of banks in safeguarding access to the mainstream payment system. The Justice Department is trying to stay on offense, vowing to move forward with Operation Choke Point after a federal judge approved the first settlement to emerge from the probe into banks' complicity with fraudulent merchants. Meanwhile, some banks are severing ties with participants in legal but controversial businesses, including check-cashers, payday lenders, and adults films, apparently in reaction to the stepped-up government scrutiny.

Big Government Problems

M&T Bank (MTB) CEO Robert Wilmers has repeatedly defended his deal to buy Hudson City Bancorp (HCBK), despite regulatory delays. To get deal approval M&T is spending $200 million to upgrade anti-money laundering compliance technology. He and fellow executives need to show some signs of good news. But new problems have emerged, such as the FBI's fraud investigation of a former M&T loan officer in Buffalo.

Leaner and Meaner?

First Niagara Financial Group (FNFG) CEO Gary Crosby needs to show that spending on branch closings and job cuts which ate into first-quarter profits is starting to yield benefits. He hopes for more good surprises, like the unusual profit boost First Niagara got in the first quarter from the use of historic tax credits to renovate old buildings in its hometown.

Efficiency Push

SunTrust (STI) CEO Bill Rogers might want to be ready with more plans for expense cuts or show big revenue growth. Though he had reason to boast about rising demand for commercial loans in the first quarter, analysts and investors focused on the bank's need to improve its expense ratio. The Atlanta bank wants to hit its goal 64% later this year, Rogers says.

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Needing a New Capital Plan

Zions Bancorp (ZION) CEO Harris Simmons will undoubtedly have to answer more questions about its capital situation. The Salt Lake City bank was the only one to fail both of the government's stress tests this year. CEO Harris Simmons has explained that Zions' internal models produced different results from the Fed's results, which he described as "puzzling." Zions planned to resubmit a plan that could involve raising more capital, expanding its loan-syndication business or proceeds from its sale of collateralized debt securities.

No Weather Excuses

Banks, like a lot of other businesses, effectively blamed many problems in the first quarter on bad winter weather around the country. They won't have that crutch this time around and will need to show better overall results in the second quarter.

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