Fee-income growth and investment activity fueled healthy second-quarter earnings increases at J.P. Morgan & Co. and First Union Corp.
With trading revenues more than doubling from the same period a year ago, to $697 million, Morgan on Thursday reported a 40% jump in net income, to $440 million.
Analysts said the New York-based company did especially well in derivatives-related areas, which bodes well for other banks active in those businesses, such as Chase Manhattan Corp.
At First Union, investment banking fees and sales of mutual funds, securities, and annuity products contributed to a 21% rise in net income, to $435.7 million.
Like other major regionals, First Union had to absorb higher credit card chargeoffs. Between the first and second quarters they rose $12 million, to $65 million.
First Union executives predicted three months ago that card chargeoffs would peak in the second quarter. But chief credit officer Malcolm T. Murray Jr. hedged a bit Thursday, saying it had become a "close call" between the second and the third.
He said the Charlotte, N.C.-based company is still confident that card losses will be declining by yearend.
Analysts expressed little concern about credit card problems at First Union, noting that the card portfolio constitutes only 4% of total loans. "As long as they've got revenue generation, they're able to provide for increased chargeoffs," said Catherine L. Murray of J.P. Morgan Securities Inc.
First Union's total chargeoffs increased 13% from the year-earlier quarter, to $102 million. The loan-loss provision jumped by 48%. But at the current level of $80 million, the provision covers only 78% of chargeoffs, leading some analysts to question whether First Union is reserving enough.
"They are still getting some benefit from under-provisioning, relative to actual chargeoffs," said Merrill Lynch analyst Sandra J. Flannigan.
First Union considers its reserve "very strong," covering 195% of nonperforming loans and 1.6% of net loans, said Mr. Murray. He noted a third of the loan portfolio is low-risk residential mortgages. He added that First Union's provision would probably begin matching net chargeoffs next year.
The $140 billion-asset company also experienced a slowdown in loan growth during the second quarter, to 4% from 11% a year before. Net interest income improved by 9% from the year-earlier quarter, to $1.3 billion.
Fee income was helped by First Union's introduction of new products into the northeastern region served by the former First Fidelity Bancorp., a 1995 acquisition. First Fidelity had not offered its customers much in the way of investment or capital market services.
"Since we are seeing loan growth slow, their ability to grow fee income is a real positive," Ms. Flannigan said. "We continue to be impressed with their revenue gains."
At the $199 billion-asset J.P. Morgan, a recovery in the once-maligned derivatives dealing business helped exceed Wall Street earnings estimates for the third straight quarter.
Analysts said they had continually underestimated the bank's ability to generate earnings from its worldwide securities trading business.
A principal component of the trading revenue is a host of debt and equity derivative products for corporate customers. Though the company doesn't disclose derivatives revenue, it reported that high demand for these hedging instruments fueled stronger-than-expected trading profits.
"The market for high-margin risk management products has come back and Morgan is a principal player in it," said Lawrence Cohn, an analyst with PaineWebber Inc.
Robert Albertson of Goldman, Sachs & Co. predicted that leading derivatives banks such as Morgan and Chase Manhattan would continue to surprise analysts with the strength of their revenues from these products in coming quarters.
"There is no way to keep this puppy down," Mr. Albertson said.
This story was written by Jacqueline S. Gold, based on reports from Kenneth Cline and John Kimelman. +++
J.P. Morgan & Co.
New York Dollar amounts in millions (except per share) Second Quarter 2Q96 2Q95 Net income $440.0 $315.0 Per share 2.14 1.56 ROA 0.84% 0.73% ROE 17.10% 13.40% Net interest margin 1.01% 1.67% Net interest income 419.0 535.0 Noninterest income 1,364.0 941.0 Noninterest expense 1,104.0 984.0 Loss provision NA NA Net chargeoffs 8.0 NA Year to Date 1996 1995 Net income $879.0 $570.0 Per share 4.28 2.83 ROA 0.85% 0.65% ROE 17.10% 12.30% Net interest margin 1.02% 1.62% Net interest income 837.0 1,064.0 Noninterest income 2,708.0 1,829.0 Noninterest expense 2,189.0 1,986.0 Loss provision NA NA Net chargeoffs (5.0) 1.0 Balance Sheet 6/30/96 6/30/95 Assets $198,765.0 $166,560.0 Deposits 48,457.0 45,316.0 Loans 29,588.0 24,043.0 Reserve/nonp. loans 839.6% 608.6% Nonperf. loans/loans 0.5% 0.8% Nonperf. assets/assets 0.07% 0.11% Nonperf. assets/loans + OREO NA NA Leverage cap. ratio 6.20% 6.00% Tier 1 cap. ratio 8.0% 8.7% Tier 1+2 cap. ratio 11.70% 12.8%
First Union Corp. Charlotte, N.C. Dollar amounts in millions (except per share) Second Quarter 2Q96 2Q95 Net income $435.7 $359.3 Per share 1.55 1.30 ROA 1.30% 1.28% ROE 19.11% 17.32% Net interest margin 4.17% 4.62% Net interest income 1,289.2 1,184.7 Noninterest income 540.1 431.4 Noninterest expense 1,051.6 980.0 Loss provision 80.0 54.0 Net chargeoffs 102.0 90.1 Year to Date 1996 1995 Net income $674.6 $696.9 Per share 2.40 2.49 ROA 1.03% 1.27% ROE 14.99% 16.92% Net interest margin 4.18% 4.64% Net interest income 2,476.7 2,283.7 Noninterest income 1,072.0 855.6 Noninterest expense 2,344.3 1,936.5 Loss provision 150.0 96.5 Net chargeoffs 250.1 161.0 Balance Sheet 6/30/96 6/30/95 Assets $139,886.0 $118,462.0 Deposits 91,453.0 87,661.0 Loans 91,339.0 84,020.0 Reserve/nonp. loans 195% 244% Nonperf. loans/loans 0.80% 0.76% Nonperf. assets/assets 0.60% 0.71% Nonperf. assets/loans + OREO 0.91% 1.00% Leverage cap. ratio 5.58% 5.96% Tier 1 cap. ratio 6.86% 7.31% Tier 1+2 cap. ratio 11.40% 11.72% ===
