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NIM expansion enables big banks' earnings beats in Q3

For the second quarter in a row, all four of the largest U.S. banks reported a stronger net interest margin than the previous quarter. That helped three of the Big Four banks beat their consensus earnings-per-share estimates for the third quarter, aided by a significant jump in share repurchases.

JPMorgan Chase & Co. led the way in earnings beats, beating its consensus per-share estimate by 8 cents, followed by Citigroup Inc. coming in 7 cents higher than consensus. Bank of America Corp. topped estimates by 4 cents per share. Wells Fargo & Co. was the only one of the four banks — all of which boast more than $1 trillion in total assets — to miss its consensus EPS estimate, falling short by 4 cents.

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Despite the miss, analysts and the market were upbeat on Wells Fargo. Conversely, Bank of America and JPMorgan shares dipped slightly despite beating consensus estimates. In research notes, analysts tabbed loan growth as the cause of the market reaction. For Wells Fargo, in particular, analysts noted that strong growth has helped allay market fears that the bank's reputational issues from a series of scandals might weigh on the company's ability to grow.

"We expect shares of Wells Fargo will continue to rise as long as the company can continue to show investors that business momentum is returning to the company," wrote Brian Kleinhanzl, an analyst for Keefe Bruyette & Woods, in a note.

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Similarly, analysts wrote that tepid loan growth at JPMorgan and Bank of America was the driver of their weaker stock performance despite strong operating performance from both banks. JPMorgan's net interest margin expanded by a robust 8 basis points in the quarter and Bank of America was not far behind with a gain of 6 basis points in the quarter.

"Bottom line results are benefiting from good expense control and strong credit quality. [Bank of America's] efficiency ratio was 57% in [the quarter] and continues to trend downward despite continued investment in the franchise," wrote Lisa Kwasnowski, an analyst for DBRS, in a note. She wrote that the bank's investments in technology and digital were "critical" and contributed to a significant competitive advantage. Bank of America's efficiency ratio in the quarter was down more than 4 percentage points from the year-ago period, by far the largest decline among the large banks.

For JPMorgan, analysts reported mostly solid operating results outside of some mixed results in the bank's trading division. Overall, the bank continues to report robust profit with a 1.29% return on average assets and nearly 8% year-over-year growth in normalized revenue. Those strong fundamental results combined with a "relatively positive outlook into 2019" did not warrant the selloff in the bank's stock, wrote Jeffery Harte, an analyst for Sandler O'Neill.

"While we understand investor concerns about industry loan growth and funding pressures are widespread, we are feeling upward pressure on our [earnings] estimates for [JPMorgan]," Harte wrote.

On Citigroup, Harte wrote that the bank's overall revenue figure was relatively flat on a year-over-year basis and below his estimate. He attributed the bank's miss to underperformance in the institution's global consumer banking unit. He highlighted management comments pointing to investment product headwinds in Asia, but he said higher revenue yields in the card segment were promising.

EPS metrics at all four banks were improved by heavy share repurchase activity. Wells Fargo led the way with $7.4 billion worth of share repurchases during the quarter, nearly triple the amount it bought in the year-ago quarter. The other three large banks each bought back about $5 billion worth of shares during the quarter. In aggregate, the four banks repurchased $22.1 billion worth of shares, up from $15.2 billion in the previous quarter and $15.8 billion in the prior-year period.

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