Bloomberg -- Morgan Stanley, Bank of America Corp. and Wells Fargo & Co. are poised to lead the six largest U.S. lenders by reporting a jump in earnings that may surprise some investors fixated on a slump in trading and mortgage lending.
The three banks probably will post combined third-quarter profit of $8.64 billion, or 14 percent more than a year earlier, according to analysts’ estimates compiled by Bloomberg. JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. will report a 7.8 percent drop, the estimates show. Five of the six firms may have squeezed more profit from each dollar of revenue as they benefited from expense cuts and a stronger U.S. economy.
“I see companies that are improving their profitability,” said David Hilder, an analyst at Drexel Hamilton LLC in New York who recommends buying stock in five of the banks including Morgan Stanley. Investors may be caught off guard “if individual analysts or the market have been too focused on lower fixed-income trading revenue or mortgage refinancing revenue.”
JPMorgan is among lenders that said results will suffer from a bond-trading slump, while Wells Fargo guided analysts to expect mortgage originations to fall by almost 30 percent. The forecasts reflected clients pulling back amid speculation the Federal Reserve will slow its $85 billion in monthly bond buying. That led analysts to cut estimates for earnings at the six banks by 6.7 percent in September.
It was the biggest drop in average estimates in the final month of a quarter since a decline of more than 24 percent in June 2012. The revisions this time began before the Fed announced Sept. 18 it would maintain purchases, which may have given banks a bump in trading during the quarter’s final days.
The headwinds until then mean Morgan Stanley probably generated more revenue than Goldman Sachs for the first time in two years, according to the estimates. Goldman Sachs, once the most profitable Wall Street firm, gets the largest share of its income from trading of any of the six banks. Morgan Stanley Chief Executive Officer James Gorman, 55, has been reshaping his firm to rely more on its brokerage for earnings as U.S. stock markets reach record highs.
In total, the six banks probably will report revenue of $100.9 billion for the quarter, a 3.4 percent decline from a year earlier, according to analysts’ estimates.
JPMorgan, the biggest U.S. bank by assets, and Wells Fargo, the nation’s top mortgage lender, kick off earnings Oct. 11. Bank of America, Citigroup, Morgan Stanley and Goldman Sachs release results the following week. Spokesmen for the lenders declined to comment on earnings before the reports.
Banks have countered revenue declines by dismissing workers, consolidating offices and wringing costs out of operations -- efforts that are starting to pay off. In the first few years after the crisis, many firms talked about expense reductions with limited success.
Wells Fargo announced in July 2011 it would cut $1.5 billion in quarterly costs before backtracking a year later in favor of an efficiency-ratio target. Bank of America’s program, announced two years ago, is designed to achieve $8 billion in annual cost savings by 2015.
In this year’s first half, JPMorgan reduced noninterest expense by $2.02 billion compared with the year-earlier period. San Francisco-based Wells Fargo cut $735 million from costs, and Bank of America trimmed $671 million. Citigroup’s expenses rose by $234 million.
The cost-cutting hasn’t helped firms raise their returns on equity, or ROE, to pre-crisis levels, when they averaged more than 20 percent. Wells Fargo led banks with a 14 percent ROE in the first half, while JPMorgan and Goldman Sachs posted 13 percent and 12 percent, respectively. Citigroup, Morgan Stanley and Bank of America were all below 9 percent.
Morgan Stanley’s third-quarter profit probably will rise 30 percent to $819 million, adjusting for one-time items, the estimates show. Earnings for Charlotte, North Carolina-based Bank of America, the nation’s second-largest lender, may climb 14 percent to $2.55 billion, while Wells Fargo’s increase 12 percent to $5.28 billion.
Goldman Sachs’s earnings may slide 12 percent to $1.29 billion. JPMorgan’s profit could fall 11 percent to $5.3 billion as it sets aside more funds to end legal disputes. Citigroup may say earnings fell 1 percent to $3.24 billion.
While Goldman Sachs and Morgan Stanley grappled with a drop in trading, Morgan Stanley probably boosted revenue 16 percent at its retail brokerage, the largest in the U.S. by advisor count, according to estimates from Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Wells Fargo, owner of the third-biggest brokerage, also may benefit from commissions, Hilder said.
Morgan Stanley’s total revenue may climb 1.4 percent to $7.66 billion, while Goldman Sachs’s drops 12 percent to $7.35 billion, according to analysts surveyed.
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