Jumpy Markets Leave Their Mark On First-Quarter Earnings Reports

Volatile financial markets figured heavily in the latest batch of first-quarter earnings reports.

First Union Corp., citing hefty gains from capital markets activities and capital management, said Thursday that its profits jumped 12%, adjusted for a special charge a year earlier.

But J.P. Morgan & Co. said its earnings slid 3%, largely because of March's steep drop in stock and bond prices.

Though disparate, the results at each company beat analysts' expectations. First Union earned $471 million, or $1.67 a share-1 cent ahead of the consensus estimate. Morgan earned $424 million, or $2.04 a share-12 cents above the consensus.

The reports set the tone for a wave of earnings releases due next week, analysts said.

"We are expecting the four C's: earnings consistency, capital strength, cost control, and consolidation," said Bradley G. Ball, a vice president of equity research at Credit Suisse First Boston.

J.P. Morgan, the nation's fourth-largest bank, reported a 5% gain in revenue, to $1.8 billion.

"Revenues were up thanks to the strength and global diversification of our business," said Chairman Douglas A. Warner.

The bulk of the gains came from proprietary trading and investing, where revenues rose 28%, to $276 million.

But revenues from market-making activities declined 5%, to $733 million. Within that group, fixed income revenues in developed markets declined to $246 million from $456 million. Analysts said those losses were partially offset by gains in emerging markets.

The company said revenues from equity investments fell 26%, to $49 million.

J.P. Morgan, like some regional banks, continued to find success in generating more income from client-related services, analysts said.

The $226 billion-asset company reported 8% growth in revenues from advisory services, to $451 million, and 9% growth in revenues from asset management, to $375 million.

The bank ranks fourth in U.S. debt and equity underwriting, up from eighth one year ago, according to Securities Data Co. J.P. Morgan reported that revenue from underwriting jumped 61% from last year.

In general, analysts were pleased by Morgan's results.

"They came in on the high side," said Raphael Soifer, an analyst at Brown Brothers Harriman. "They have better than expected trading results, and we are seeing a continued core strength in investment banking."

But some observers said the bank, which has always relied heavily on its trading and advisory activities, could have a tough battle ahead, as rising interest rates choke off underwriting business.

"We expect underwriting revenues to flatten out," said Lawrence W. Cohn, an analyst at PaineWebber Inc.

At $137 billion-asset First Union, the results included a 5% increase in net interest income, a 47% growth in fee income, and improving expense management. The first-quarter efficiency ratio was 56.81%, compared to 57.36% in last year's first quarter.

"I was expecting a good increase (in fees), but this was better," said Carole Berger, an analyst at Salomon Brothers. "There is clearly good momentum in almost all areas of the fee-based businesses."

First Union officials were particularly pleased with the capital markets and capital management groups. In the first quarter, revenue from the capital markets group was up 67%. The capital management group, meanwhile, increased its fee income by 61%.

Overall, first quarter fee income, including securities transactions, totaled $753 million, compared to $526 million in the first quarter of 1996.

Capital management and capital markets "are the two big engines that we have been building. Those are the ones that are paying off for us," said Robert Atwood, First Union's chief financial officer. "We're counting on them to continue to generate significant revenues in the future."

Average net loans, which totaled $94.6 million in the first quarter, were up 6%. Nonperforming assets were down to $778 million, or .81% of net loans and foreclosed properties. That compares to $842 million, or .93% of net loans and foreclosed properties, in 1996's first quarter.

One dark cloud for First Union was its rising credit card losses, which totaled about $100 million in the first quarter, compared to $77 million in the fourth quarter of 1996, and $53 million in the first quarter of 1996.

Still, credit cards make up less than 6% of the company's outstanding loans, and the rest of the portfolio is considered healthy, analysts said. +++

First Union Corp.

Charlotte, N.C.

Dollar amounts in millions (except per share)

First Quarter 1Q97 1Q96

Net income $471.0 $239.0*

Per share 1.67 0.85*

ROA 1.42% 0.75%*

ROE 19.58% 10.76%*

Net interest margin 4.37% 4.19%

Net interest income 1,303.0 1,237.0

Noninterest income 753.0 526.0

Noninterest expense 1,169.0 1,011.0*

Loss provision 145.0 70.0

Net chargeoffs 144.0 148.0

Balance Sheet 3/31/97 3/31/96

Assets $136,730.0 $130,581.0

Deposits 92,403.0 90,518.0

Loans 95,487.0 89,990.0

Reserve/nonp. loans 199% 197%

Nonperf. loans/loans 0.72% 0.81%

Nonperf. assets/assets 0.57% 0.64%

Nonperf. assets/loans + OREO 0.81% 0.93%

Leverage cap. ratio 6.13% 5.56%

Tier 1 cap. ratio 7.38% 7.00%

Tier 1+2 cap. ratio 12.10% 11.91%

*Includes merger-related charges

J.P. Morgan & Co. Inc.

New York

Dollar amounts in millions (except per share)

First Quarter 1Q97 1Q96

Net income $424.0 $439.0

Per share 2.04 2.13

ROA 0.73% 0.86%

ROE 15.70% 17.20%

Net interest margin 1.01% 1.03%

Net interest income 470.0 418.0

Noninterest income 1,383.0 1,344.0

Noninterest expense 1,191.0 1,085.0

Loss provision 1,113.0 1,117.0

Net chargeoffs (3.0) (13.0)

Balance Sheet 3/31/97 3/31/96

Assets $226,382.0 $204,747.0

Deposits 53,571.0 50,204.0

Loans 29,453.0 28,645.0

Reserve/nonp. loans 1,223.1% 716.0%

Nonperf. loans/loans 0.30% 0.50%

Nonperf. assets/assets 0.05% 0.08%

Nonperf. assets/loans + OREO NA NA

Leverage cap. ratio 5.90% 6.20%

Tier 1 cap. ratio 8.90% 8.30%

Tier 1+2 cap. ratio 12.60% 12.20% ===