JPMorgan, Wells Fargo Issue Mixed Q1 Reports; Analysts Weigh In

Shares of big U.S. banks Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) headed in different directions Friday after the banks reported mixed first-quarter earnings.

Wells Fargo told investors that a lower interest rate outlook, flatter yield curve and tightening loan spreads will drive down its net interest income by at least 2 percent in 2019. At the same time, JPMorgan reported 8-percent net interest income growth and a 2.5-percent increase in net interest margin.

Several Wall Street analysts weighed in on the two bank stocks following the quarterly prints. 

Challenging Backdrop

BMO Capital Markets analyst James Fotheringham said revenue strength and lower expenses were a recipe for better-than-expected earnings for JPMorgan. “After a slow start to the year, the C&IB result drove the 1Q19 beat and appears to have taken share against a challenging market backdrop,” he said in a Friday note. 

The analyst said the net interest income guidance from Wells Fargo is troubling. “We continue to see greater opportunity elsewhere in our coverage of large-cap banks (C, MS, and COF), specialty lenders (SC and OMF), and financial technology (V and GPN)." 

Bank of America Merrill Lynch analyst Erika Najarian said JPMorgan's revenue growth was even more impressive given a challenging backdrop. “During the earnings call, management indicated its FY19 spread income target of $58bn+ would be predominantly driven by balance sheet optimization efforts, however, noted modest pressure from a flatter yield curve." 

The analyst downgraded Wells Fargo to Neutral and said low visibility and a lack of positive catalysts suggest there are better investment opportunities elsewhere in the near-term. “We want to be clear: we are not telling long-term shareholders to sell WFC at what appears to be depressed levels relative to its EPS power potential,” she said. 

Overcoming Weakness

CFRA analyst Kenneth Leon said JPMorgan was able to overcome weakness in fixed-income trading, investment banking and wealth management in the first quarter. “The positives were strength in the Consumer Bank with higher net interest income, credit card fees (up 9%) and consumer loan growth, especially from home lending,” he said. 

Wells Fargo investors are still waiting on clarity about when the Federal Reserve’s asset cap will be lifted, Leon said. “The bank's expense ratio weakened by 80 bps to 64.4% in Q1 2019 vs. 63.6% in Q4 2018 and trails peers in the upper-50% range." 

No Reason To Panic

TD Ameritrade senior trading specialist Shawn Cruz said JPMorgan’s strong loan book is a positive indicator for the overall U.S. economy. "One of the best leading indicators of economic performance is expansion of credit. That’s positive for the banks and the economy in general,” he said. 

Cruz said there’s no reason for Wells Fargo investors to panic. “They did have a few issues with some write-downs and a few troubled spots in their loan book, but in general it looks like business is trucking along." 

Edward Jones analyst Kyle Sanders said Wells Fargo’s quarter was mixed, with strong buybacks, positive credit measures and cost improvements offsetting light revenue and loan growth.

“We believe Wells will continue to focus on expense reductions and share buybacks in the near-term to drive EPS growth, as revenue and loan growth momentum will likely take more time as the company tries to restore its image,” he said. 

Ratings And Price Targets

• BMO maintained a Market Perform rating on JPMorgan and raised the price target from $116 to $118.
• Bank of America has a Buy rating and $116 target for J.P. Morgan.
• CFRA has a Buy rating on JPMorgan and lifted the price target from $110 to $117. 
• BMO maintained a Market Perform rating on Wells Fargo and lowered the price target from $65 to $63. 
• Bank of America downgraded Wells Fargo from Buy to Neutral and lowered the price target from $57 to $50. 
• CFRA maintained a Sell rating on Wells Fargo and raised its price target from $42 to $44.  

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