Don’t Think All Bank Earnings Will Be The Same

Have you noticed that bank earnings reports so far have been pretty good? Wells Fargo (WFC) reported a good quarter and raised their dividend 10% yesterday, which sparked the market rally, despite the company’s large exposure to the California housing market. Today we got earnings above expectations from JP Morgan Chase (JPM) and PNC Financial (PNC). Does that mean that all the banks are out of the woods? Not really.

Unfortunately, the first banks to report were the better managed banks in the country (you can add U.S. Bancorp (USB) to the aforementioned three). Those four banks are very good at managing risk, hence their strong relative performance. The Wells Fargo report yesterday does not mean that other California-heavy mortgage lenders will be as fortunate. Wells simply had stronger underwriting criteria during the boom than other banks such as Washington Mutual (WM), National City (NCC), and Wachovia (WB), which can easily be seen in the underlying performance of their loan books.

Investors should continue to refrain from treating all banks the same. Companies like PNC, WFC, JPM, and USB are going to outperform the likes of WM, WB, and NCC for the second quarter and beyond simply because they have much better lending practices.

Full Disclosure: Long PNC and USB at the time of writing

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3 Thoughts on “Don’t Think All Bank Earnings Will Be The Same

  1. Anonymous on July 17, 2008 at 8:03 PM said:

    Chad, do you honestly think that the rank-and-file mortgage bankers at, for instance, the WFC branch in Berkeley, CA was doing anything different from the rank-and-file mortgage banker at Golden West (now Wachovia)? They increased the time period before they treat loans as delinquent from 120 to 180 days. They still have lots of HELOCs over 90% LTV.

    All that said, I will reserve final judgment until the 10Q is published with its juicy details. Until then, treat the earnings release and conference call as an infomercial.

    –Bond investor

  2. DaveinHackensack on July 18, 2008 at 1:02 AM said:

    It also hasn’t hurt PNC that it has a more diversified business than some other banks, with its servicing business (what used to be called PFPC) and its stake in Blackrock.

  3. Chad Brand on July 21, 2008 at 4:49 AM said:


    I am with you that one would not expect one California lender to be much different than another, especially when the lending environment was so out of whack with reality.

    That said, the performance of the loans speaks volumes and thus far Well Fargo’s loans are performing far better than the likes of Golden West for the key 2005 and later vintages.

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