Large bank earnings good but not enough
Bank earnings boosted by trading, lower costs; NIMs sink at larger banks.
It has taken eight years but large bank earnings are moving back to pre-crisis levels. First quarter earnings for the majority of the large US banks came in above expectations – although of course banks are masters of managing these.
The failure experience of largest banks may be significantly higher during the next downturn
Markets helped the banks in the first quarter with commodities trading revenues benefiting from energy price fluctuations and weather concerns, and the macro environment boosting FX and fixed income trading.
Goldman Sachs CFO Harvey Schwartz says that higher earnings from trading are expected to continue though the second quarter and that transactions in investment banking are expected to increase. Most banks also benefited from lower costs and claim, though not for the first time, that the bulk of the regulatory settlements are now behind them.
Morgan Stanley enjoyed its best quarter since 2007, with net revenues up at $9.9 billion – up 10% on last years. Return on common equity was 14.1% versus 9.2% for the same quarter last year. Growth came mainly from trading which saw revenues up 23% on the first quarter of last year and up 152% on the fourth quarter.
The commodities business benefited from structured transactions, improved client flow and extreme weather, said the firm’s CFO Ruth Porat. Wealth management achieved record revenue, record revenue per financial adviser and delivered a pre-tax margin of 22%.
Goldman Sachs generated its highest quarterly results in four years with net revenues of $10.6 billion. Investment banking produced net revenues of $1.91 billion, which is the highest quarterly performance since 2007 and up 7% on the same period last year.
FICC trading revenues were up 10% to $3.13 billion. CFO Harvey Schwartz said that with regards to FICC, the firm has benefited from is the diversity of the businesses. Equities trading revenues were up 46%. Net income was $2.84 billion up from $2.03 billion in the first quarter last year.
As European banks began to report, enthusiasm for markets bailing out the banks grew. “April was a tremendous month. European equities have been booming, with big inflows from US investors, as they begin to believe in ECB quantitative easing. And equity volumes have really taken off in Asia too,” one European bank executive tells Euromoney.
The underlying economic expansion that is approaching its sixth anniversary remains largely on trackJohn Stumpf, Wells Fargo
Bank of America exemplified the benefit that, for once, not having to pay out huge legal costs can have. It reported net income of $3.4 billion in the first quarter compared to a loss in the same quarter last year of $276 million. But the good news is not universal. Revenues were disappointing compared to its peers and declined by $1.3 billion due to a reduction in equity investment income. Consumer banking revenues were hit by lower net interest income though cost reductions resulted in slightly increased profits.
Chief executive Brian Moynihan and CFO Bruce Thompson said further cost cutting efforts were being made, but analysts say they are growing weary of not seeing improvements. The bank’s fixed-income, currencies, and commodities trading unit declined by 7% in the quarter as it was stung on credit and mortgages a little like Citigroup. At least revenues in its equity trading division stayed flat.
Citigroup’s revenues were down 2% to $19.7 billion in the first quarter of 2015 but better than expected. Unlike its peers its trading businesses did not benefit from the commodities and macro environment of the first quarter – largely because it had more focus on mortgages which did not fare so well.
The bank reported an 11% drop in fixed income trading revenue to $3.5 billion, and a 1% decline in equity trading revenue to $873 million. Net income was up, however, to $4.8 billion from $3.9 billion thanks to lower expenses, which had declined 10% year-over-year.
Wells Fargo’s revenues were up year-on-year by 3% at $21.3 billion although the bank disappointed analysts with net income down 2% at $5.8 billion. Unlike at many of its peers, costs were up due to increases in commissions, compensation and compliance and risk management expenses.
Chief executive John Stumpf was upbeat, however, saying that while the first-quarter economic headlines again demonstrated that the economic recovery has been uneven, he believed “the underlying economic expansion that is approaching its sixth anniversary remains largely on track”.
All five of the largest US banks, however, are underperforming the S&P 500 this year. As of April 24 only Goldman Sachs’ stock is up year-to-date by 2.14%, compared with the S&P gain of 2.85%. Bank of America’s stock is the worst performing, down 12.5% year-to-date.
Analysts remain pessimistic about the future of the large banks in spite of predominantly good earnings season. A report from Kroll Bond Rating Agency in April says that large banks are less likely than small banks to survive another downturn, even though more of the latter failed as a result of the credit crisis.
The report’s authors, including analyst Chris Whalen, say “the failure experience of largest banks may be significantly higher during the next downturn. Smaller banks will likely be more resilient… given the lessons learned during the financial crisis and effort to strengthen their balance sheets and procedures.” Whalen says small banks’ stock looks better for investors given the interest rate environment because they are bigger lenders than the larger banks. They also have a better net interest margin, he says.
Net interest margins fell last year for all banks but large banks are faring the worst. The Federal Deposit Insurance Corporation (FDIC) said that for all US banks, the average fourth-quarter net interest margin was 3.12%, down from 3.27% a year earlier. According to data site, BankRegData, the net interest margin for 100 banks with less than $3 billion in assets rose in the first quarter to 3.54% from lows of 3.15% last year.
By comparison Wells Fargo’s interest margin fell in the first quarter to 2.95% from 3.04% at the end of 2014 and 3.2% in the first quarter a year ago. JPMorgan’s fell to 2.07%.