First-quarter earnings from the large US banks might have beaten analyst expectations but the question now is, are they sustainable?
Investment banking fees were down year on year 15% at the top-five US investment banks combined. Sales and trading revenues were also down year on year, but were much improved on the dire preceding quarter.
| IB fee revenues down |
| Citi exception to the rule |
 |
| Source: Bank earnings supplements |
Kush Goel, financial research analyst at Neuberger Berman, says: "The trading side was much better than anticipated. People thought fixed income, currencies and commodities (FICC) would show strong results and they did, but so too did equities. The general concern, however, is will that be sustained? "There is more noise again from Europe, with questions now over Spain, and the last couple of years we’ve seen strong first quarters followed by a drop-off, so that remains to be seen. People are also worried about the benefits of the Long-Term Refinancing Operation [LTRO] wearing off."
JPMorgan chief executive Jamie Dimon said in his Q1 earnings call that the LTRO had not removed concerns about Europe. "[It took] the catastrophe off the table [but] it is a short-term fix. Not a permanent fix."
He described the eurozone’s environment of growth and austerity as "an accordion for the next 18 months". He also added that if the US were to fall back into a recession, all bets would be off again.
JPMorgan Chase reported net income of $5.4 billion for the quarter, down $200 million year on year, but better than analyst expectations. Its earnings were boosted by a swing to profits in its mortgage unit, and a boost in consumer and business banking.
David Viniar, CFO at Goldman Sachs, was also cautious in his outlook for the markets. "In the near term, the current operating environment warrants a prudent approach to managing capital and liquidity levels, and a continued focus on expense initiatives," he says.
Goldman Sachs’s earnings beat analyst expectations. The firm’s total net income was $2.1 billion, down from $2.7 billion in the first quarter last year, although double that of the fourth quarter last year.
A boost in trading accounted for much of the pick-up, along with expense cuts. The investment bank cut its headcount by 3% during the first quarter, and expenses were 14% lower than in the first quarter of 2011.
Citi, too, strove to improve its efficiency. Goel says: "Citi seems to have made an improvement on getting their expenses under control, but they will need to keep them down for a couple more quarters to prove they have dealt with costs."
Citi reported a net income of $2.9 billion for the first quarter, down just $60 million year on year. Excluding accounting adjustments to its credit and debt valuations, the bank’s earnings would have come in above expectations.
Like its peers, the bank did better from sales and trading, and also mortgage banking. It was also the only top-five player to show an increase in investment banking revenues year on year. Chief executive Vikram Pandit said it was evidence that its investments were paying off.
Analyst Meredith Whitney, who has been vociferously bearish on Citi for several years, even took off her sell rating.
Dealing with expenses was also high on the agenda for Morgan Stanley. Non-compensation expenses were 2% lower than the quarter before at $2.3 billion, and while overall compensation expenses rose $100 million year on year, chief executive James Gorman states: "[Because of] the actions we’ve taken in the last few years, we meaningfully reduced the ratio, striking a balance between driving return on equity [ROE] and investing in the franchise."
ROE was over 9% – that’s up from 2% in 2009. Morgan Stanley posted a loss of $78 million for the quarter, as it included the negative impact of $2 billion on revenues related to its debt valuation adjustment (DVA).
Excluding the DVA, revenues came in more than $1 billion higher than analysts had forecast – again, FICC trading had been a large contributor to revenues, and wealth management and asset management saw an uptick from the fourth quarter 2011.
CFO Ruth Porat said that the results highlighted "that the firm is far more balanced and diverse today than [it has] been in some time".
Finally, Bank of America (BofA) reported a net income of $653 million – compared with $2 billion in net income a year ago but more than analysts were expecting – again helped by sales and trading revenues, and a cut in expenses.
The bank reported charges of $4.8 billion related to changes in the value of its debt. Expenses dropped 5.6% and the bank now has 10,000 fewer employees than a year ago.
BofA also appears to have made progress in its real-estate unit, as losses were half that of last year’s first quarter. Goel says: "What’s important for Bank of America is that its capital position is improving. But there still are concerns about reps and warranties claims and its earnings power over the next few years." The bank’s tier 1 common equity ratio rose to 10.78%.
While there were some bright spots among the earnings, and beating analyst forecasts always adds some cheer, the post-earnings mood was one of caution.
Improvements in consumer and mortgage banking are reliant on a sustained recovery in the US, while sales and trading revenues will be affected by events in the eurozone. As one analyst says: "Gone are the days of bumper earnings from the banks."
