In the US, not unlike motherhood and apple pie,
understanding core income was a foundation stone for the analysis of F.I.’s for
many of my generation. We even look outside the traditional big US institutions
and try to apply a deep dive on past, future, and comparable core income
drivers with comfort. The past years’
flow of reserve releases, we thought, was an anomaly surely to fade. Now we look at 2014 published results. Consider (try reading aloud) these two recent
(DB excerpt) paragraphs from early analysis:
WFC had $250m of LLR release, $235m of net MSR hedge gains,
$217m related to the sale of gov’t guaranteed student loans, $186m of
securities gains, and $39m mortgage repurchase reserve release. There were also
some tax credits. On the flip side, some lumpy expenses—although most seemed
more seasonal vs. one off. Legal costs weren’t disclosed, but we estimate them
to be about $150m higher than normal (operating losses declined $100m q/q and
$250m accruals last qtr).
JPM reported EPS included a number of items (most notably
$1b of after tax legal costs and a $500m tax credit) and there were several
modest reclasses in business segments—which combined make it tricky to compare
to estimates. Adjusted EPS of $1.33), but this still includes some lumpy items
(such as mortgage repurchase reversals, MSR losses, reserve release in the
corporate book, other CVA etc).
Far from diminishing
reliance on (often netting) lumpy items, banks seems to post results where
these special items are on the increase both in frequency and magnitude.
Sum-of-the-parts, comparables, peer comparisons, and other tools that sought an
understanding of core income are frustrated at best.
The legions of managers
devoted to creation and utilization of this accounting mechanism have succeeded
in imbedding them into the fabric of their companies. I offer the view that
without a clear view of core income, that we can link to business models, it is
necessary to attribute large amounts of (hard to mitigate) risk.
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