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BofA's EPS spikes again; JPMorgan's fortress strengthens in deposits, people

Bank of America Corp.'s third-quarter results are drawing compliments, but the North Carolina-based bank shares the spotlight with JPMorgan Chase & Co.

BofA managed a 17.1% year-over-year increase in normalized EPS in the third quarter — an improvement above its peers' achievements. Oppenheimer's Chris Kotowski called the earnings results "an illustration of how to win at banking's game of inches." That said, as Vertical Group's Dick Bove argued in a research report, BofA may be "making the right moves [but] cannot overcome the economy in the short run."

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JPMorgan, which has usurped BofA as the U.S.' largest deposit holder, posted an 11.4% year-over-year hike in normalized EPS, to $1.76. It also grew normalized revenue the most and has the lowest efficiency ratio of the Big Four. On efficiency, while BofA and Citigroup Inc. have slashed their headcounts year after year, JPMorgan has increased its ranks by 15,825 full-time equivalent employees in two years.

The banks had warned about lower trading revenues. At JPMorgan, that manifested as a 27% drop in fixed income markets from year-ago levels. At BofA, fixed income, currencies and commodities fell 22%; at Citi, it was 16%.

On its earnings call, JPMorgan noted an additional $50 million charge-off in its auto book, "reflecting regulatory guidance on the treatment of customer bankruptcies" and a $300 million addition to its card reserves — an allowance Kotowski points out is "reasonable" after the $8 billion increase in the credit card portfolio.

Citi and Wells Fargo & Co., meanwhile, have their specific hurdles to overcome. Bove, for example, wrote that the former "is clearly liability sensitive." The federal funds rate has risen 100 basis points since December 2015. Citi had a net interest margin of 3.03% for the third quarter of that year. Its NIM fell to 2.96% for the same period in 2016, and then again to 2.81% for the recent quarter. Even Wells Fargo, which had seen its NIM slide year over year from the third quarter of 2010 through the first quarter of 2017, managed an increase over the last period. Citi, Bove clarified, has 54% of its deposits overseas, where central banks are not raising rates. Nevertheless, Vining Sparks' Marty Mosby and Mason Mosby commented that, for all of Citi's progress on its many strategic initiatives, "there has been only minimal improvement in its overall profitability."

That profitability earned it a special mention in an International Monetary Fund report on financial stability. IMF analysts identified nine global systemically important banks with returns not projected to reach the 8% cost of equity in 2019. Their unsustainability was attributed to "high operating costs, low operating efficiency, and highly competitive home markets, exacerbated in several cases by weak information technology systems." Citi was the only U.S.-based bank on the list. For the third quarter, it reported a return on average equity of 7.19%, up from the year-ago figure of 6.63%. BofA's was 8.17%, up from 7.37%; JPMorgan's was 10.44%, up from 9.97%.

At Wells Fargo, return on average equity dropped to 8.95%, compared with the year-ago quarter's 11.09%. During the last 14 quarters, Wells Fargo's ROAE has been up on a year-over-year basis just once, which was in the second quarter of 2017. The San Francisco-based company is still trying to rebuild its reputation — submitting unbeatable bids to score government contracts, rehiring employees, shaking up its top ranks and heading into lawmakers' "bear traps" better prepared. It is also targeting a $4 billion cut to expenses by the end of 2019. Approximately 21% will be achieved by the end of this year, and 50% by the end of 2018, CFO John Shrewsberry noted on the company's earnings call.

Despite the focus on cost cuts and reputation rebuilding, the bank is making room on its plate for new business. CEO Tim Sloan, touching on mortgages, cycles and going digital, told analysts: "[T]his recovery is very different ... because of the impacts of demographics." He was referring to millennials. It seems to be in the early innings, Sloan added, and the bank is "focused on rolling out [its] new digital mortgage application" in the first quarter of 2018, for those finally starting families and who "want a mortgage experience, that maybe you and I didn't experience when we bought our first home."

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