Bank preferreds mixed as Citi, JPMorgan beat expectations; Wells Fargo barely misses

By Stephanie N. Rotondo

Seattle, April 13 – Bank earnings season started with a bang on Thursday, as J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. all announced results that mostly beat expectations.

However, given the holiday, trading in those names was limited.

Citigroup’s 7.875% fixed-to-floating rate trust preferred securities (NYSE: CPrN) added a nickel, closing at $26.70. JPMorgan’s 6.1% series AA noncumulative preferreds (NYSE: JPMPrG) improved 17 cents to $27.02.

Wells Fargo’s 5.5% series X class A noncumulative preferreds (NYSE: WFCPrX), however, dipped a penny to $24.94.

Wells Fargo was the only bank of the three that didn’t completely beat expectations.

For the quarter, Citi reported net income of $4.1 billion, a 17% increase from the year before. On a per-share basis, earnings were $1.35, versus the $1.24 a share analysts polled by Thomson Reuters had forecast.

Revenue came in at $18.12 billion, compared to expectations of $17.76 billion.

Revenue was helped in part by a 19% gain in fixed income trading revenue and a 10% improvement in equity trading revenue.

JPMorgan meantime posted first-quarter EPS of $1.65 on revenue of $25.6 billion.

Analysts expected the bank to post EPS of $1.52 on revenue of $24.87 billion.

Like Citi, JPMorgan also saw an increase in fixed income and equity trading revenue, which improved 17% and 2%, respectively.

The bank also said that there was improvement in its consumer businesses, as deposits rose 11% year over year.

For Wells Fargo, the results were more mixed. EPS was better at $1.00 – versus the 97 cents analysts had predicted – but revenue barely missed expectations at $22 billion.

“On the bright side, we are hearing a pick-up in the calendar after Easter and with banks getting through earnings,” a trader said.

With all of the “pent-up demand” for new paper, the trader opined that “now is a good time” to bring $25-par preferreds versus $1,000-par hybrid paper.

In particular, JPMorgan, Wells Fargo or Citi could be first to tap the market.

“I’m dying for Citi to bring something,” the trader said. Citi, for its part, has a 5.8% series C noncumulative preferred issue (NYSE: CPrC) that is “getting quite rich,” trading with a 5.65% strip yield.

“There are banks with better credit profiles that aren’t trading as wide,” he said.

But it’s not just those banks that should take advantage, the trader said. There are many issuers that have high-coupon issues that are currently – or soon will be – callable.

Take, for instance, First Republic Bank’s 5.625% series C noncumulative preferreds (NYSE: FRCPrC).

“They have been around a long time,” the trader pointed out, as the paper was issued on Nov. 15, 2012. At the end of 2017, the issue becomes callable.

Therefore, it is a “great joke” that the issue was just slated to be added to the S&P U.S. Preferred Stock index. That news resulted in the shares hitting a negative yield to call.

“So you are now locking in a loss,” the trader said.

As such, First Republic should seriously consider calling the deal and replacing it, he said.

© 2015 Prospect News.
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