JPMorgan and Citi hint at broader Wells Fargo woes

October 14, 2016

The author is Reuters Breakingviews columnist. The opinions expressed are his own. 

JPMorgan and Citigroup are hinting at broader woes for Wells Fargo. Wall Street helped the two diversified mega-banks trounce third-quarter earnings expectations, while the more retail-focused of the trio just squeaked by. As Wells Fargo Chief Executive Tim Sloan contends with the sham-accounts fiasco, he also will be tested by falling returns.

The scandal that cost Sloan’s predecessor John Stumpf his job earlier this week has yet to have any discernible effect. Only $5 million had to be set aside to compensate customers and the $185 million in fines are a rounding error. Though Wells Fargo’s profit fell 2.6 percent from a year ago, the San Francisco-based bank generated $5.6 billion worth in the three months ending Sept. 30.

It’s far from over, however. Sloan told investors on Friday that credit-card applications fell by a fifth and new bank-account openings by a quarter in September compared to the same month last year. Mortgage referrals from bankers also dropped about a quarter from August.

Wells Fargo already had been hurting. It warned shareholders in May that results were under pressure from industry-wide trends including low interest rates; lending becoming more competitive; the need to hold more cash and low-yielding assets; and loan losses creeping up.

It slashed its return-on-equity target to between 11 percent and 14 percent. Last quarter’s annualized 11.6 percent, while among the best in the business, marks the fifth straight decline.

By contrast, JPMorgan produced a 10 percent return last quarter, just enough to cover its cost of capital. Net income in retail fell as both expenses and provision for credit losses increased.

At the same time, the bank led by Jamie Dimon reported a record third quarter in investment banking and trading. Revenue from merger advice and new securities sales jumped 15 percent while fixed income and currencies sprinted ahead by 48 percent. Citi’s investment bank performed similarly well, with a 35 percent increase in bond trading helping lift the unit’s bottom line by a fifth.

It means Wall Street is at least partly offsetting problems elsewhere. Wells Fargo lacks that buffer. And only about four out of 10 clients at its broader wholesale-banking unit have used its investment-banking products in the past year. For Sloan, who spent most of his career in Wells Fargo’s commercial and investment bank, such high-level cross-selling might start to look appealing.

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