U.S.Banks:1Q16Earnings Scorecard (Round 1)

Loan Growth Accelerates. With H.8 data pointing to slower growth this quarter, we entered results season with tempered expectations but were positively surprised by JPM, BAC, and PNC, which reported accelerating growth trends in 1Q16; balances continued to decline at C, but at a slower rate. RF is the only bank to report slower growth so far.

    Revenues Modestly Lower. Net interest income growth improved sequentially across the banks (by an average of +300bps), driven by margin expansion and faster loan growth. However, NII growth was more than offset by lower fee income (-6.6% YoY vs. -2.3% in 4Q15, on average). All in, revenues decreased by an average of -0.7% YoY vs. -0.6% in 4Q15.

    Net Interest Margins Expand Modestly. Results were mixed across the banks, but were on average higher both YoY and QoQ (led by JPM, BAC, and RF), with loan yields benefiting from the December rate hike. Looking ahead, we expect margins to remain relatively stable throughout the rest of the year, without the benefit of further rate hikes (we assume no rate hikes in 2016 vs. implied market expectations of one in 4Q16).

    Expenses Improve, But Efficiency Flat. Expenses decreased by an average of -2.5% YoY across the group, except at WFC (+4.2% YoY, partly due to the addition of acquired GE Capital businesses). Average efficiency was stable YoY; individual results were mixed, with ratios improving at RF and BAC, but trending higher at C, WFC, and JPM. Energy Loan Losses and Reserve Builds Drive Higher Provision. Overall NCO rates were relatively stable across the banks, averaging ~52bps, as incremental energy loan losses were offset by improvements in other loan categories. Notably, NCO rates improved both YoY and QoQ at C and BAC, while increasing at PNC and WFC over the same period. However, provision as a percentage of loans increased across all banks both YoY and QoQ (except at C), primarily due to energy reserve builds.

    Key Takeaways

    Results so far highlight challenges to fee income growth and greater-than-expected energy-related provisioning, which we expect will keep the risk of further negative revisions in focus at the regional banks that have yet to report.