Large cap banks might continue to face headwinds as far as their revenues are concerned due to sluggish growth in loans. However, I’ll focus on any signs of improvement and try to differentiate between the banks. I believe, given the revenue challenged environment, banks which are able to contain their expenses and grow their top lines with the help of loans growth are best positioned.
I believe Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and U.S. Bancorp (NYSE:USB) are best positioned for the current environment.
Revenue trajectory
The revenue trajectory might remain disappointing for the rest of the 2013 as the environment still remains challenging for banks, particularly due to the sluggish growth in loans. Compared to the first quarter, you can expect the banks to report steady to slightly improving loan growth during the second quarter. To partially offset the pressure on the net interest margin, banks will focus on high-cost TruPS redemption, refinancing of debt, and incremental loan growth.
During the first quarter, Citigroup Inc (NYSE:C) reported best revenue growth (13% over the prior quarter). This is because it is considered more sensitive to the U.S. capital markets than its peers. Going forward, you can expect the bank to report sequentially higher revenue due to its prior quarter’s loan growth. The bank reported a 5% surge in its loans during the first quarter. These loans will generate higher return during the second quarter.
Other large banks, such as Wells Fargo & Co (NYSE:WFC) and U.S. Bancorp (NYSE:USB), experienced significant pressure on their revenues as their mortgage banking revenues plunged and their net interest rate margin contracted. U.S. Bancorp (NYSE:USB) reported a 4.7% sequential revenue plunge, while JPMorgan Chase & Co. (NYSE:JPM) reported a 6% increase in its top line at the end of the first quarter. The loans for JPMorgan Chase & Co. (NYSE:JPM) were up 5% year over year, while U.S. Bancorp (NYSE:USB) posted 5.8% growth over the same time frame. Higher loans will help the banks generate higher returns in the second quarter.
Poor mortgage banking results for everyone?
Wells Fargo & Co (NYSE:WFC) is considered the largest mortgage lender in the U.S. with a peak market share of 33%. However, during the first quarter of the current year, the bank experienced a decline in its mortgage origination volumes, while the gain on sale margins did not provide any support either.
Overall gain on sale margins fell 30% over the prior quarter. You should expect the banks to report further declines in the margins this quarter. A seasonal uptick is making some banks optimistic about their originations this quarter. Among these banks are JPMorgan Chase & Co. (NYSE:JPM), U.S. Bancorp (NYSE:USB), and Citigroup Inc (NYSE:C).
During the first quarter, JPMorgan Chase & Co. (NYSE:JPM) reported a 33% increase in its mortgage application volumes and increased its market share from 10.6% to 11% over the prior year. Citigroup Inc (NYSE:C) originated mortgages worth $63 billion during the first quarter. Both Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) reported a surge in their mortgage originations during the quarter, while home lending volume dipped 12.8% year over year for Wells Fargo & Co (NYSE:WFC). U.S. Bancorp (NYSE:USB) maintained a 4% market share in mortgage originations, while Wells Fargo & Co (NYSE:WFC)’s share plunged to 22%.
Expense control will be the key
Given the revenue dampened situation, expense control was the primary lever during the first quarter. I believe it will continue to be a key differentiator in profitability in 2013. Expense savings tend to provide support to the bottom lines and banks are looking to pull the expense levers during times like these. Several banks have made good progress on this front during 2013. The ones who make progress this year will be the ones who provide value to their shareholders.
During the first quarter, Citigroup Inc (NYSE:C) produced an impressive 10% sequential decline in its non-interest expenses and US Bancorp’s plunged 8% over the same time frame. Going forward, Citigroup expects to fund a few of its acquisitions through the costs it saves. Therefore, you can expect continued cost saving programs being implemented at Citigroup. JPMorgan was able bring down its expenses by 4% over the prior quarter. Bank of America made some progress on this front as well. It saved $900 million during the full-year 2012 under its New BAC cost cutting program. It anticipates accumulated savings of $1.5 billion by this year end.
Foolish takeaway
The current revenue dampened environment creates a lot of headwinds for the large cap U.S. banks. However, Citigroup, JPMorgan, and US Bancorp are best placed to carry on under the given situation. These banks have shown some strength in their first-quarter results, and I believe they will continue to show strength. Therefore, I am bullish on these banks.
Adnan Khan has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc (NYSE:C) and JPMorgan Chase & Co (NYSE:JPM).. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Weak Revenue Environment Is Not a Problem for These Banks originally appeared on Fool.com is written by Adnan Khan.
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