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Earnings Preview: Major Banks give Insight into Economic Health

Two Down, Two to go. It’s earnings season. This week is one of four times a year that the world’s largest corporations report their earnings to their shareholders. It’s time to look back on the second quarter of 2014. Think of it as a report card on a grand scale. Just like that “C” in gym class earned for not being able to get up the rope, failure to live up to shareholder expectations can cast serious doubt on the direction and fitness of the organization.

Industry wide failure to live up to expectations can be a sign of trouble for the broader economy. Although an incomplete picture because various sectors throughout the economy are also reporting, the aggregate earnings reports of four megabanks are seen to be a bellwether for economic health or infirmity.

Wells Fargo and Citigroup have already reported. Wells Fargo’s earnings were encouraging. Citigroup gets an incomplete after their settlement with the Department of Justice, announced just one hour before the earnings report was released, ate up almost all of the banks second quarter profits.

The two remaining banks each have some degree of uncertainty going forward that a good earnings report would help to alleviate.

The first will be J.P. Morgan reporting on Tuesday. The megabank is in a bit of a state of flux with the recent announcement of CEO Jamie Dimon’s throat cancer. Although his prognosis is positive, the uncertainty about the time frame for his eventual return to the helm of the nation’s largest bank by assets has caused investors to give pause. Reassurance and clarification of Dimon’s situation would likely go a long way to calm fears about its direction.

The Consensus of economists surveyed predicts that the bank will report net income will be down at $5.4 billion, compared to $6.5 billion in quarter two of 2013. The bank is also expected to report a decline in revenue with the consensus estimate being $23.7 billion for the quarter, compared to $25.2 billion a year ago.

Bank of America is the other earnings domino yet to fall, reporting Wednesday morning. The Bank has uncertainty to deal with of its own as settlement negotiations with the Justice Department and possible lawsuits pertaining to the bank’s sale of residential mortgage backed securities looms large.

Last month it was reported that talks between the banks and the government had stalled out as the government balked at Bank of America’s latest settlement offer and threatened to file suit.

One thing is clear however, it remains extremely unlikely that the two sides will take the dispute to trial and Bank of America will be paying quite a large settlement at some point in the not too distant future as the posturing gives way to deal making. The example of Citigroup shows the costly effect will have on earnings.

The results remain to be seen but it’s likely that we will know much more about the health of the economy once the dust settles.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.
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