(By Mani) The Q4/12 U.S. bank earnings season is largely over, and the reported results were generally better than consensus expectations. Of the 18 banks, 11 banks beat consensus, four were below expectations and three were in line.
Margin pressure continued to be an issue this quarter, and according to management will likely continue in 2013, as well. It is largely muting the impact of loan growth, which is doing relatively well and gaining momentum both in mortgages and commercial loans.
"Capital markets revenues have recovered from last year's European -crisis induced meltdown, but sequential trading results are down, albeit after a solid Q3. Investment banking revenues on the other hand were strong relative to the previous quarter," CIBC analyst Robert Sedran wrote in a note to clients.
The biggest earnings beat was delivered by Morgan Stanley (NYSE: MS) followed by Goldman Sachs (NYSE: GS) while the largest misses came from Bank of America Corp. (NYSE: BAC) and Citigroup, Inc. (NYSE: C). The regional banks tended to perform better than expected as a group, with the only misses being First Horizon National Corp. (NYSE: FHN) and M&T Bank Corp. (NYSE: MTB).
In the wake of reporting, Goldman Sachs saw the largest upward revision to 2013 consensus earnings followed by Comerica, Inc. (NYSE: CMA). Conversely, Bank of New York Mellon Corp.(NYSE: BK) saw the largest downward revision, followed by Bank of America and First Horizon National.
"Despite the high proportion of beats to misses, o n average next year's consensus EPS estimates were revised only modestly higher (+0.6%) across the group. That is in-line with the earnings revision we saw after Q3/12 reporting, and is reflective of the mixed fundamentals for the sector as a whole," Sedran said.
While loan growth is improving, ongoing margin pressure continues to be a serious obstacle.
The continuing margin pressure is clear as demonstrated by the 12 basis-point, average year-over-year decline for the banks. That said, the average sequential decline was a more modest two basis points, which is roughly what it was last quarter for this group of banks.
Some notable declines include Wells Fargo & Co. (NYSE: WFC), despite record quarterly earnings and BB&T Corp. (NYSE: BBT), which saw margins decline by 11 and nine basis points, respectively, compared with the previous quarter.
"This should not be surprising considering the low interest rate environment that could persist for several more years as the Federal Reserve has indicated it will hold base rates near zero until the unemployment rate declines to around 6.5% (it currently sits at 7.8%)," Sedran noted.
Part of the issue for the banks is also the higher-than-normal amount of liquidity in the system, which manifests itself partly as higher demand for deposits in the banking system.
"Overall, we believe that margin pressure – from the impact of low rates, abundant liquidity and intense competition for what asset growth there is – will need to show signs of easing before earnings expectations can lift materially," Sedran said.
While margin pressure continues to bite into net interest income growth, solid loan growth is at least helping to balance out that ongoing negative. The vast majority of U.S. banks saw decent sequential growth in both total assets and net loans.
For many banks mortgage refinancing activity, helped along by government programs like HARP (Home Affordable Refinance Program), has been particularly noteworthy as a catalyst to loan growth. Commercial lending was also a notable positive for a number of regional banks in particular.
"The fact that revenues this quarter were generally down sequentially for trading (after a very strong Q3), but up big for investment banking means that overall capital markets related revenue volatility appears to be settling down; this is a positive," Sedran said.
Meanwhile, the outlook for loan growth on the conference calls was positive, with companies highlighting the improving economy and the improving housing market in particular. Although home refinancing activity will undoubtedly slow from the very strong growth now being reported that slack should be made up for in growing mortgage origination. Overall, the momentum in terms of loan growth is a positive, but it remains an uphill battle with margins.