Review & Outlook

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Big U.S. Banks & Brexit

25 July, 2016 by Paul Devine in Commentary

Two of the largest U.S. banks reported their second-quarter earnings late last week, and while the earnings were as moderately strong as most analysts had expected, it was surprising how little attention was devoted to the Brexit both by bankers and analysts.  That’s not surprising, since most of Brexit’s implications are about the future, while second-quarter earnings are about the past, before Britons voted at the end of June.

JPMorgan Chase reported on the 14th that net income of $6.2 billion was for the second quarter was 10.9% greater than the first quarter, although “relatively flat compared with the prior-year quarter”; the first quarter had included a number of special charges, and merely matching the same-quarter-prior-year’s profit counts as a good result in the current banking environment.  The next day Wells Fargo reported 2Q16 net income of $5.6 billion, essentially its profit in the same quarter of 2015.  Wells’ strong growth in loans, deposits, and revenues were in part offset, management said, by $924 million in charged-off loans and a $150 million increase in reserves for future loan losses, which together should insulate the bank from any further earnings impact on its portfolio of energy loans.

Two very large but different U.S. banks (Morgan views itself primarily as an investment bank, while Wells concentrates on retail banking) thus reported  results better than what most analysts expected.

JPMorgan Chase’s chief financial officer told analysts that the bank had done well despite the Brexit because it had prepared as thoroughly as possible for a “Leave” vote and because it earned fees helping European commercial banks—particularly in Italy and Spain—deal with the market upheaval that followed the news.  One analyst asked the CFO if there would be operational or legal issues that might emerge, and she responded that it’s too soon to tell, but that the bank would continue to support its clients; CEO Jamie Dimon said “there is a range of outcomes” that will not be determined for years, but that JPM is “not going to pull back on serving” European clients.  Another analyst asked if Brexit changed the outlook for M&A, and the CFO replied that generally uncertainty discourages acquisitions, but “at the end of the day” there “would be a tailwind” for M&A.

Wells Fargo’s CFO told analysts that the bank had benefited from buying early in 2Q16 investment securities with “interest rate levels above those available later in the quarter, after the ‘Brexit’ vote.”  The “biggest impact of Brexit was not on how we do business,” the CFO said, “but the big move down in long-term rates.  It’s a great time to be a borrower.”   One analyst asked about Wells’ prospects for its Commercial & Industrial lending division, whether there were Brexit concerns.  The CFO responded that he was “not sure what would build certainty among businessmen” but that while C&I is “not as vibrant a sector as it has been at other times,” that placidity reflects “seasonal or short-term factors” and that “there’s no big story there.”

After all the fuss in the financial press in advance of the British referendum, the surprise victory of the Leave advocates, the brief spasm in financial markets, and the downfall of a Prime Minister, the event which three months ago everyone expected would shape the quarter’s market results turns out to have been a non-event for large U.S. banks and almost all U.S. individual investors.

Will it continue to be immaterial?  It’s hard to say at this early date.  But there’s one small piece of evidence that Brexit won’t be so bad for the future:   In the days after Brexit the Wall Street Journal reported that Wells Fargo took advantage of the pound’s weakness to buy a new office building for £300 million—in the heart of the City of London.