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For 'Big 4,' populist wave turns the tide


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For 'Big 4,' populist wave turns the tide

In the final three months of 2016, the biggest banks in the U.S. continued surfing the populist wave. The boost from Brexit was followed by a boost from the U.S. election, with President Donald Trump ushering in a period of regulatory pullback.

Thanks to post-election trading, revenue from equities rose 15% year over year at Citigroup Inc., 8% year over year at JPMorgan Chase & Co. and 7% at Bank of America Corp. Fixed income did even better. It was up 36% at Citi, 31% at JPMorgan and 12% at BofA.

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Fourth-quarter results were also notable in that they contained Citi's last separate reporting of Citi Holdings. The New York-based company had finally whittled its bad bank's assets down to $54 billion from more than $800 billion at its peak.

BofA's own redemption story continues, with expenses down $22 billion from $77 billion back in 2011 and "room to move them [even] lower." As good as that sounds, industry observers wonder what else there may be. FBR & Co.'s Paul Miller, in an interview, put it this way: "They haven't earned their cost of capital; their earnings haven't grown in years; they've been cost cutting, cost cutting, cost cutting. ... Bank of America, we think, is best positioned [for higher rates and tax cuts] ... but the bar is low."

Others have sounded more forgiving. Oppenheimer's Chris Kotowski wrote that BofA "has finally emerged from a long history of distractingly noisy results, and what we see now is a bank with improving business trends that may finally translate into a growing bottom line." And Vining Sparks' Marty and Mason Mosby pointed out the company "[outpaces] any increase in credit costs with higher net interest income [and improves] its operating efficiency ratio meaningfully year over year."

The turnaround story to watch now would be Wells Fargo & Co., where there are signs of optimism. Despite struggling for months with the fallout from its fake-accounts scandal, Wells' stock price rose almost 15% from the time Trump was proclaimed America's next president to the end of the quarter. Customer activity in its retail banking arm, while still down from year-ago figures, has picked up month over month.

But while clients have stuck around and deposits continue to grow, FBR & Co.'s Miller points out: "Their whole business model was cross-sell, and right now there [are] no cross-sell referrals going on." And while that may not "have a bottom-line impact anytime soon," he expects growth to take a hit. Miller acknowledges that Wells has tried to make amends, but he also thinks the damage might be "almost a three-year cycle to work through."

Wells Fargo has also announced it plans to cut costs by $2 billion annually by the end of 2018 and close about 200 branches this year and another 200 or more in 2018 in line with that goal. But branch consolidations can only do so much. Piper Jaffray's Kevin Barker calculates in a report that a Wells Fargo branch costs approximately $800,000 to operate, meaning the shuttering of 400 only saves the bank about $320 million.

The real potential is in the new administration's pro-business tone and the Cabinet picks' Wall Street history. But optimism and substantial stock gains notwithstanding, most are keeping their enthusiasm reined in. JPMorgan CEO Jamie Dimon has remarked, "There's a lot of wood to be chopped and sausage to be made." Regulations will continue to weigh on profits, FBR & Co.'s Miller explains, "because they can't get rid of Dodd-Frank, they can't get rid of the stress tests." What people are excited about is no longer being under an administration where "every time you turn around, somebody was regulating something else."

"It's not about this quarter. It's about what happens a year from now ... if Trump gets his policies done," Miller added.

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