Wednesday, 16 July 2014

Bank Earnings Surprise on Pickup in Trading


Two of the biggest U.S. banks posted better-than-expected quarterly results on Tuesday, driven by a June uptick in some of the same trading businesses that have dragged down Wall Street results over the past year.

Investors sent shares of J.P. Morgan Chase JPM +3.52%  & Co. and Goldman Sachs Group Inc. GS +1.30%  higher after the reports, even though bank executives warned that a sustained recovery in Wall Street's biggest business wasn't imminent.

Trading has slumped for the past year as markets muddled through an unusually slow stretch. J.P. Morgan lowered investors' expectations further in May when it predicted its quarterly trading revenue would drop by 20%. Later that month, Goldman President Gary Cohn warned that conditions remained difficult.

Yet on Tuesday, J.P. Morgan and Goldman reported that some clients had turned more active in the quarter's final weeks, helping the banks avoid a steeper drop. Both banks still posted double-digit trading-revenue declines, and neither offered investors much comfort that the June pickup would continue.

"It's not something we should do cartwheels over, but something we can stand up and cheer" about, said Tom Jalics, a senior investment analyst for Cleveland-based Key Private Bank, which manages J.P. Morgan and Goldman shares. "We should take note today but should be cautious about trading results going forward as well."

For at least one day, however, bank investors could exhale. J.P. Morgan's shares rose 3.5% to $58.27 in 4 p.m. New York Stock Exchange composite trading, while Goldman climbed 1.3% to $169.17. Other bank stocks, including those of Citigroup Inc., C +1.80%  Bank of America Corp. BAC +1.54%  and Morgan Stanley, MS +0.60%  also rose.

Bank of America reports second-quarter results on Wednesday, while Morgan Stanley reports on Thursday.

Goldman became the first big U.S. bank to boast higher quarterly revenue than it reported for a year earlier. The New York firm said total revenue climbed 6% to $9.13 billion, while net income rose 5.5% to $2.04 billion, or $4.10 a share. Analysts polled by Thomson Reuters expected per-share earnings of $3.05 on revenue of $7.97 billion.

Goldman leaned heavily on other businesses to offset the trading decline. Its investment-banking arm reported revenue of $1.78 billion, up 15% from a year ago. The firm had a record quarter in underwriting revenue, and merger-advisory revenue climbed 4.1%. Goldman's own portfolio of equity and debt investments surged in value.

Goldman, which hadn't offered a specific forecast earlier, reported that trading revenue in fixed income, currencies and commodities, or FICC, fell 8.6% from a year earlier to $2.22 billion. Citigroup on Monday reported its own FICC revenue had dropped 12%.

Wall Street usually slows during the summer months, meaning investors might have to wait until fall for signs of a trading recovery, said Jeffrey Harte, an analyst with Sandler O'Neill + Partners LP. Bank traders usually benefit when markets turn choppier, giving them more opportunities to profit from swings in the prices of securities.

"The market will want to see volatility picking up," Mr. Harte said. "I don't think that's something you hear in August."

During a conference call with analysts, Goldman Chief Financial Officer Harvey Schwartz noted that client trading activity improved as investors geared up for European Central Bank policy decisions. But when asked about July, he said it was "too early to tell."

Goldman's operating expenses rose 5.6% to $6.3 billion. The firm set aside $3.92 billion for employee pay and benefits, or 43% of revenue, matching the firm's so-called compensation ratio in the first quarter.

J.P. Morgan, the largest U.S. bank by assets, posted net income of $5.99 billion, or $1.46 a share, for the second quarter, compared with $6.5 billion, or $1.60 a share, a year earlier. Revenue declined 3% to $24.45 billion, but both figures beat analysts' projections as tracked by Thomson Reuters of $1.29 a share in earnings and revenue of $23.76 billion.

Revenue from fixed-income markets fell 15% from the previous year on what the bank said was "historically low levels of volatility and lower client activity across products."

"Our operating assumption is that it will stay at low levels for a while," James Dimon, J.P. Morgan's chairman and chief executive, said during a conference call with analysts, adding that the next two quarters are expected to have low activity compared with the second half of 2013.

J.P. Morgan finance chief Marianne Lake added that June brought "generally higher levels of activity." But that momentum hasn't carried into July so far, she said.

J.P. Morgan's latest results came about two weeks after Mr. Dimon revealed publicly that he has throat cancer. On a call with reporters, the 58-year-old CEO said the treatable cancer hasn't spread and that doctors have spent the past few weeks completing his treatment plan. "I'm hoping the next time I talk about this at all, in eight weeks or something, I'll tell you it's complete and the prognosis is very good," he said.

Few large banks associate their image with a single leader as much as J.P. Morgan, where Mr. Dimon has been both chairman and CEO since the end of 2006. Mr. Dimon's diagnosis has raised questions about the bank's succession plan as well as the extent to which the CEO will have to pull back from regular duties while undergoing treatment.

Mr. Dimon on Tuesday added that he still expects to be involved in the business during the treatment whether in the office, on the phone or by video conference. He said he would take "a few weeks of rest" after the treatment, as advised by his doctors.

Like other banks, J.P. Morgan reported that its investment bankers are picking up some of the slack for trading desks that are dealing with a sluggish environment. The bank's equity-underwriting revenue jumped about 4%, and advisory revenue jumped 31%.

The New York bank again showed weakness in its mortgage business as it, like its peers, continues to reel from a sharp slowdown in refinancing. Mortgage originations of $16.8 billion fell 66% from the previous year.

But the weakness doesn't suggest that consumers and businesses are on their heels. Average loan balances in the commercial-banking unit were $140.8 billion, up 7% from a year earlier and 2% from the previous quarter.





Updated July 15, 2014 8:50 p.m. ET

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