NEW YORK (AFP) – Large U.S. banks have been stand-outs in the early part of the second-quarter earnings season, but analysts are warning of speed bumps ahead.
The major banks have posted big profit increases that bested analyst expectations.
They gained from better credit quality, the absence of heavy provisions that had marred prior quarters, and strong investment banking.
That said, loan growth remained anemic, particularly to consumers, who continue to skimp on spending.
Banks also face tough questions on the implications of higher interest rates and new proposed regulations to require higher capital buffers. And some analysts are skeptical the recent jump in profits is sustainable.
Jamie Dimon, chief executive of JPMorgan Chase, said loan growth remains “soft,” citing the “cautious stance” by consumers and businesses.
“However, we continue to see broad-based signs that the U.S. economy is improving and we are hopeful that, as jobs are added and the confidence builds, the U.S. economy will strengthen over time,” Dimon said.
JPMorgan posted a 31 percent increase in profits to $6.5 billion compared with the year-ago period, a result fueled by a big jump in investment banking and improved credit quality.
But the bank, the largest in the U.S. by revenue, also prospered from the absence of a $4.4 billion charge in the year-ago period tied to its losses in the so-called “London whale” trading debacle.
In future quarters, JPMorgan and its peers will not benefit from cheery comparisons with a one-off event like the whale, said Erik Oja, an analyst at S&P Capital IQ. Oja also sees little further opportunity for cost-cutting.
“I don’t think it’s going to be sustainable,” Oja said of JPMorgan’s robust second-quarter performance.
JPMorgan was also among the most cautious about mortgage banking, warning of a big potential drop in mortgage refinancings if interest rates continue to rise.
Mortgage banking was also a weak point for Bank of America, which saw losses in consumer real estate deepen to $937 million from $744 million.
But Bank of America’s profit rise cheered the market, in part because of deep cost cuts and the absence of large charges that have plagued recent quarters.
Bank of America, which suffered badly during the financial crisis, also outperformed on commercial loans, which surged 20 percent to $380.5 billion.
“We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead,” said chief executive Bruce Thompson.
Citigroup, another bare-survivor of the crisis, scored from big gains in equity and fixed-income trading and from solid revenues in emerging markets.
But Citi saw consumer loans tumble 7 percent to $382.2 billion. Chief financial officer John Gerspach said U.S. consumers were still in a period of “deleveraging” that might last at least a few more quarters.
“If the economy continues to drag along in something like the 1.5-2 percent (growth) range, I think that’s going to present a challenge,” Gerspach said.
Investment banks Goldman Sachs and Morgan Stanley benefited from big gains in equity and debt underwriting.
Trading of equities and other investments was also strong, though Goldman cautioned that results in its fixed-income and some other divisions faded toward the end of the quarter as interest rates rose.
While a higher interest-rate environment poses some challenges, analysts note there is also an upside, particularly in a strengthening economy.
Higher rates allow banks to make more on the loans they provide compared with the interest they must pay to customers.
A potential shift in Federal Reserve policy to scale back its aggressive bond-buying program would likely yield a bumpy quarter or two as credit demand weakens, said FTN Financial chief economist Chris Low.
“But in the long run, banking will be more profitable if the Fed allows interest rates to be set by the market,” Low said.
Despite lower profits in mortgage banking, Wells Fargo, the nation’s largest mortgage originator, said rising home prices had boosted credit quality, allowing it to write back to profits $500 million from earlier loss allowances.
The housing market in the second quarter “was stronger and more broad-based than it had been since before 2008,” said Wells Fargo chief executive John Stumpf.
“Assuming the housing market remains strong, and we currently believe it will, our results should continue to reflect these benefits.”
Photo Credit: AFP/Saul Loeb