Preferred market rises amid bank earnings; investors ponder PNC; Fannie, Freddie retreat

By Stephanie N. Rotondo

Phoenix, Oct. 14 – As global economic indicators continued to worry investors, preferred stocks were moving higher Tuesday, spurred by the kick-off of bank earnings.

“JPMorgan, Citigroup and Wells Fargo all reported earnings that were decent,” a trader said, noting that JPMorgan “missed [expectations] a little.”

Most of the banks’ preferreds were on the rise in early trading.

Freddie Mac and Fannie Mae paper were also “bouncing” yet again in early trading, continuing a trend from Friday when Fairhome Funds said it was appealing a federal judge’s ruling that dismissed lawsuits alleging the government’s takeover of profits was illegal.

But the preferreds lost those early gains, ultimately ending the day softer. The agencies’ common stock, however, finished higher.

The primary space meantime remained quiet, even with the firmer tone and the “decent” bank earnings.

The Wells Fargo Hybrid and Preferred Securities index closed up 23 basis points.

JPMorgan misses

JPMorgan Chase & Co. released its third-quarter results on Tuesday, showing a swing to profit year over year.

However, the results missed analysts’ expectations.

Despite missing those forecasts, the bank’s preferreds were on the rise.

The 6.7% series T noncumulative preferred stock (NYSE: JPMPB) gained a nickel to $25.86, while the 6.3% series W noncumulative preferreds (NYSE: JPMPE) put on 7 cents, ending at $25.10.

For the quarter, JPMorgan reported a net profit of $5.6 billion, or $1.36 per share. That compared to a loss of $380 million the year before.

Analysts polled by Thomson Reuters were expecting earnings per share of $1.38 on average.

Total revenues got a 5% boost, coming in at $24.2 billion versus $23.1 billion the year before.

Though the company’s capital markets – trading revenues improved 1.2% from the previous year – and loan units showed signs of strength, unexpected legal costs of $1 billion offset those gains. Additionally, the company said it was experiencing higher-than-expected operating costs, noting that it could finish the year well over its annual expense target of $58 billion.

Citi beats expectations

Citigroup Inc. was also in the bank earnings lineup on Tuesday, reporting better-than-expected results.

Like JPMorgan, Citi’s preferreds were all doing better in trading.

The 6.875% series L noncumulative preferred shares (NYSE: CPL) firmed up 2 cents to $25.65, and the 7.875% fixed-to-floating rate trust preferred securities (NYSE: CPN) gained 11 cents to $26.98.

Citigroup posted third-quarter profits of $3.44 billion, or $1.07 per share. That compared to income of $3.23 billion in the same quarter of 2013.

Without accounting adjustments, Citigroup saw earnings of $1.15 per share, better than the $1.12 predicted by analysts polled by Thomson Reuters.

Revenues gained 9.5% to $19.6 billion. On an adjusted basis, revenue was $19.98 billion, better than analysts’ expectations of $19.05 billion.

Trading revenue improved 6.7%, with fixed income seeing a 5% gain and equities increasing 14%.

Following JPMorgan’s trend, Citigroup also saw a rise in legal expenses, which were up 40%. Operating expenses were also on the rise, increasing 6%.

The bank recently warned that stress-test preparations would increase its costs. This year, the company’s capital plan was rejected by the Federal Reserve.

Also in the company’s earnings announcement came two other tidbits for investors to chew on: that the bank planned to exit the consumer-banking sector in 11 more countries and that it had detected – finally – fraud at its personal security unit in Mexico.

Due to the fraud, which allegedly took place over several years, the unit of Banamex will be shuttered.

Wells mixed post-earnings

Wells Fargo & Co. rounded out the day’s bank earnings. The San Francisco-based bank saw improvement during the quarter, due in part to a gain in corporate loans.

The company’s results were also in line with expectations.

However, Wells’ preferreds were the only ones among the three banks that saw any trace of weakness during the trading day.

The 5.85% series Q fixed-to-floating rate noncumulative perpetual preferreds (NYSE: WFCPQ) finished off 2 cents at $26.02. The 6% series T class A noncumulative preferreds (NYSE: WFCPT) meantime closed flat at $24.94.

The latter issue was the most actively traded paper in the structure.

Net income for the third quarter rose 2.7% to $5.72 billion, or $1.02 per share – exactly what analysts polled by Thomson Reuters had expected.

Revenue was $21.2 billion, a shade higher than the $21.1 billion analysts had forecast.

Commercial and industrial loans came to $212 billion, a 12% increase year over year.

Unlike JPMorgan and Citi, Wells also managed to keep its expenses under wraps. Non-interest expenses were 57.7% of revenue, down from 59.1% a year before.

Investors eye PNC

With more banks slated to bring out earnings this week, investors are keeping an eye on PNC Financial Services Group Inc.

The Pittsburgh-based company has posted quarterly results that have beat expectations for the last year. Investors are now wondering if the bank can keep up that trend.

PNC’s 6.125% series P fixed-to-floating rate noncumulative perpetual preferreds (NYSE: PNCPP) were very active in Tuesday trading. In fact, the issue saw more activity than any of the JPMorgan, Citi or Wells Fargo issues.

The preferreds ended the day up 9 cents at $26.94.

Earnings are slated for release on Thursday.

Fannie, Freddie in focus

Fannie and Freddie preferreds rose in early trading but gave back those gains by the end of business.

Initially, Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 33 cents, or 7.76%, at mid-morning, trading at $4.58. Freddie’s fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) had put on a quarter, or 5.4%, to $4.80.

But by the market’s close, Fannie’s shares had fallen 18 cents, or 4.24%, to $4.07, while Freddie’s fell 24 cents, or 5.27%, to $4.31.

The preferreds had started to climb back up on Friday as Fairholme Funds said it had officially filed an appeal against a Sept. 30 decision that dismissed investors’ lawsuits regarding the government’s takeover of a majority of the agencies’ profits.

U.S. federal judge Royce Lamberth was responsible for the decision, which said that the government did not do anything illegal by consigning the profits.

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