As big U.S. banks approach earnings this week, they're taking a page from a familiar playbook: Under-promise and over-deliver.
That's been the strategy since the financial crisis, as low interest rates have crushed margins, consumers continued deleveraging and trading activity bumbled along. A boom in mortgage refinancing in 2012 was billed a surprise, as was one in corporate borrowing in 2013 and 2014—both thanks to the Federal Reserve keeping bond yields near all-time lows.
Without those surprises, bank investors found little to like. Revenues have risen only slightly, and legal costs have skyrocketed. The Department of Justice took in more than $25 billion in 2014 alone, thanks in large part to hefty settlements from Citigroup and Bank of America. In the face of those headwinds, banks have been forced to reach their profit targets by cutting costs and releasing money previously saved to cover bad loans.
Investors may see 2014 earnings—when they begin in earnest Wednesday—carry more of the same demons.
"The large banks will continue to have issues with regulators and capital," said Anton Schutz, who invests in banks at Mendon Capital. Small banks, Schutz argued, have greater chance for upside since they're seeing real loan growth, less regulation and insulation from swings in investment banking and markets activities.
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Take, for instance, comments made by the CEOs of Bank of America and Citigroup at a recent investor conference, in which they attempted to lower expectations for trading revenues in the most recent quarter. Recent volatility—which normally spurs more transaction volume—would do little to lift overall sales, according to BofA CEO Brian Moynihan.
"The volumes are going up, but the revenue is under pressure" because more trading is done electronically, activity that "doesn't charge much," Moynihan told investors. He made the further warning that the fourth quarter's trading revenue would be lower compared to the prior quarter and the prior year.
At the same conference, Citigroup CEO Michael Corbat said trading revenues at his bank would be down as well, in addition to announcing a $3.5 billion legal and repositioning charge associated with certain federal investigations as well as restructuring. Despite that charge, Corbat said Citi should still eke out a "slight" profit, though investor patience is wearing thin after a $7 billion July settlement over toxic mortgages and some $1.6 billion in assorted legal charges in the third quarter.
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Even though JPMorgan Chase may have worked out more of its legal issues than its peers, it has other unique issues it's facing—namely the Fed singling out JPMorgan as needing upward of $20 billion more capital on hand to meet new, stricter rules. CFO Marianne Lake acknowledged in December that compliance may carry upfront costs.
"Having higher capital puts pressure on [return on equity] targets, particularly in the short term," Lake told investors at a Goldman Sachs conference. She also pointed to "surgically" improving profits in the face of those costs as well as dealing with continued weakness in the trading and mortgage environments.
Given all that, analysts have muted expectations for what Wall Street made in 2014.
Estimates for the universal banks, on average, show overall revenue falling for the fourth quarter compared to the prior year. Analysts see only Wells Fargo, the nation's largest mortgage provider, improving full-year revenue compared to 2013.
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Interestingly, Wall Street sees slight improvement to bottom lines, with banks pulling other levers to please shareholders.
But real organic revenue growth, analysts say, would require yet another surprise.
