J.P. Morgan & Co., Norwest Corp., and First Union Corp. joined the parade of top banking companies attributing healthy second-quarter earnings increases to fee-generating businesses such as investment banking and asset management.
All met or beat Wall Street expectations Tuesday, with gains in noninterest income in line with those disclosed Monday by NationsBank Corp. and First Chicago NBD Corp.
"Banks that have spent money on capital markets are going to be in better shape going forward," said Harold R. Schroeder, an analyst at Keefe, Bruyette & Woods Inc.
J.P. Morgan's net income jumped 29%, to $481 million, including a $131 million pretax gain from the sale of its global trust business to Citicorp.
Without that item, operating profits rose 7%, to $402 million, fueled by trading income and fees from mergers-and-acquisitions advising and debt and equity underwriting. Per-share earnings excluding the one-time gain were $1.96, 6 cents better than analysts estimated.
Analysts cheered Morgan's ability to keep operating expenses flat. They were actually down from the first quarter, excluding a $215 million charge in that period as part of a productivity-improvement program.
"We are just starting to see some of the impact from that first-quarter charge," said Diane Glossman, an analyst at Lehman Brothers. "But they still have a way to go."
Norwest Corp., Minneapolis, saw its net rise 15%, to $382 million, thanks to gains in mortgage banking, trust and investments, service charges, and insurance. Earnings per share of 49 cents were in line with Wall Street's expectations.
"It's a similar theme to what we've seen-it's really fee revenues driving overall revenue growth," said Joseph Duwan, an analyst with Keefe, Bruyette & Woods.
First Union Corp.'s net income declined 63%, to $249 million, due to a $954 million charge related to the acquisitions of CoreStates Financial Corp. and Money Store.
Without the acquisition charge, Charlotte, N.C.-based First Union's profits would have jumped 23%, to $883 million, or 92 cents a share. That beat the analysts' second-quarter consensus by 2 cents.
Capital markets and asset management were the principal drivers of earnings for the $229 billion-asset bank. Robert Atwood, chief financial officer, said results from the two units "validates our investment in these two areas since 1994."
J.P. Morgan
Despite the generally positive cast of the results at $281 billion-asset Morgan, some analysts remained wary about the bank's ability to strengthen its returns over the long term.
"It was a good quarter," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. "But I would like to see more evidence of the trend in future quarters."
The flat operating expenses were a bright spot in the second quarter, while revenues grew 1%.
The $215 million restructuring charge in the first quarter was an investment in keeping the rate of future expense growth below revenue growth. Projected savings of $250 million from that program were to be funneled into "growth businesses" like investment banking and asset management, the bank said.
Trading income gave New York-based Morgan its biggest earnings boost, analysts said. Profits from market making leaped 42%, to $920 million, and the foreign exchange portion rose 75%, to $147 million.
In the investment banking area, fees from advisory services and debt and equity underwriting rose 31%, to $334 million.
Fees from asset management, another business Morgan has been emphasizing, grew 14%, to $445 million. Total assets under management rose to $300 billion from $234 billion a year earlier. In 1997, Morgan paid $900 million to acquire a 45% stake in American Century Cos., a Kansas City, Mo., mutual fund firm.
Morgan's exposure to the troubled Asian region dropped 26%, to $3.4 billion, since the end of March and 44% since the beginning of the year. Net chargeoffs in the quarter were $83 million, primarily related to derivatives with South Korean and Indonesian counterparties.
Norwest
At $93 billion-asset Norwest, mortgage banking income jumped 62%, to $287 million. Service charges and fees rose 15%, to $163 million, trust and investment income 23%, to $132 million, and insurance 11%, to $110 million.
These healthy fee gains enabled Norwest-planning to close its merger with Wells Fargo & Co. in the fourth quarter-to improve profits despite a continued lag in consumer finance.
"Diversification pulls them through," said Diana Yates of A.G. Edwards & Sons, St. Louis. "In this case it's mortgage banking."
Norwest Financial, the finance unit, contributed $54 million in second- quarter earnings, a 19% decline. Norwest cited credit losses stemming from the acquisition last year of Fidelity Acceptance Corp. and high bankruptcy levels in Puerto Rico.
Net interest income grew 8%, to $1.1 billion, and the net interest margin was off 15 basis points, to 5.54%.
Noninterest expenses rose 18%, to $1.3 billion. Salaries and benefits were $722 million, up 27%.
First Union
First Union's noninterest income jumped 51%, to $1.6 billion. Capital markets and asset management accounted for 53% of First Union's fee revenue.
"Companies that have developed a prowess in capital markets are really beginning to enjoy the benefits, and First Union is no exception," said Sally Pope Davis, an analyst at Goldman, Sachs & Co.
Fees from capital markets rose 52%, to $397 million. Investment banking fees were up 184%, to $202 million, and risk management fees were up 70%, to $46 million.
Fees from asset management grew 61%, to $443 million. Those from brokerage services leaped 62%, to $189 million, and fees from mutual fund sales rose 61%, to $102 million.
Amid a boom in housing and loan refinancings, fees from mortgage banking doubled to $121 million.
First Union said it expected to take $150 million more in merger-related charges later this year.
Fees also figured in reports by smaller holding companies. Huntington Bancshares of Columbus, Ohio, boosted net income 10%, to $92.3 million, as brokerage, insurance, and mortgage banking fees rose 25%.
The net at First Tennessee National Corp., Memphis, was up 14%, $52.7 million, driven largely by mortgage banking and capital markets. Noninterest income rose 23% at Summit Bancorp, Princeton, N.J., whose net rose 13%, to $118.5 million.
Amsouth Bancorp. of Alabama boosted net income 17%, to $65.5 million, and the monoline credit card issuer MBNA Corp. was up 24% to $172 million. +++
First Union Corp. Charlotte, N.C. Dollar amounts in millions (except per share) Second Quarter 2Q98 2Q97 Net income $249.0 $682.0 Per share 0.26 0.70 ROA 1.61% 1.47% ROE 23.91% 20.42% Net interest margin 3.86% 4.65% Net interest income 1,847.0 2,008.0 Noninterest income 1,557.0 1,041.0 Noninterest expense 2,877.0 1,771.0 Loss provision 150.0 228.0 Net chargeoffs 156.0 238.0 Year to Date 1998 1997 Net income $1,039.0 $1,385.0 Per share 1.07 1.42 ROA 1.58% 1.48% ROE 22.55% 20.36% Net interest margin 4.00% 4.68% Net interest income 3,707.0 3,950.0 Noninterest income 2,934.0 2,075.0 Noninterest expense 4,772.0 3,459.0 Loss provision 285.0 433.0 Net chargeoffs 285.0 447.0 Balance Sheet 6/30/98 6/30/97 Assets $228,996.0 $201,642.0 Deposits 138,598.0 135,202.0 Loans 137,613.0 136,676.0 Reserve/nonp. loans 235% 242% Nonperf. loans/loans 0.58% 0.66% Nonperf. assets/assets 0.40% 0.51% Nonperf. assets/loans + OREO 0.66% 0.75% Leverage cap. ratio 5.99% 6.73% Tier 1 cap. ratio 7.21% 7.88% Tier 1+2 cap. ratio 11.56% 12.56%
Norwest Corp. Minneapolis, Minn. Dollar amounts in millions (except per share) Second Quarter 2Q98 2Q97 Net income $382.1 $331.4 Per share 0.49 0.43 ROA 1.65% 1.61% ROE 23.10% 22.10% Net interest margin 5.54% 5.69% Net interest income 1,093.0 1,011.6 Noninterest income 950.2 756.4 Noninterest expense 1,324.5 1,119.7 Loss provision 139.4 122.8 Net chargeoffs 139.6 114.8 Year to Date 1998 1997 Net income $749.8 $653.3 Per share 0.96 0.85 ROA 1.67% 1.62% ROE 23.00% 22.40% Net interest margin 5.65% 5.66% Net interest income 2,171.7 1,978.8 Noninterest income 1,760.5 1,441.0 Noninterest expense 2,534.5 2,161.2 Loss provision 263.9 231.8 Net chargeoffs 271.0 226.8 Balance Sheet 6/30/98 6/30/97 Assets $93,153.3 $83,856.3 Deposits 56,795.2 51,971.4 Loans 43,390.8 40,783.8 Reserve/nonp. loans 585.6% 569.9% Nonperf. loans/loans 0.50% 0.46% Nonperf. assets/assets 0.28% 0.28% Nonperf. assets/loans + OREO 0.61% 0.57% Leverage cap. ratio 6.44% 6.43% Tier 1 cap. ratio 8.84% 9.11% Tier 1+2 cap. ratio 10.64% 11.03%
J.P. Morgan & Co. New York Dollar amounts in millions (except per share) Second Quarter 2Q98 2Q97 Net income $481.0 $374.0 Per share 2.36 1.85 ROA 0.68% 0.62% ROE 17.30% 14.10% Net interest margin 0.59% 1.06% Net interest income 306.0 513.0 Noninterest income 1,863.0 1,296.0 Noninterest expense 1,416.0 1,241.0 Loss provision 0.0 0.0 Net chargeoffs (83.0) (3.0) Year to Date 1998 1997 Net income $718.0 $798.0 Per share 3.51 3.89 ROA 0.52% 0.67% ROE 13.00% 14.90% Net interest margin 0.63% 1.03% Net interest income 657.0 983.0 Noninterest income 3,524.0 2,679.0 Noninterest expense 3,048.0 2,432.0 Loss provision 0.0 0.0 Net chargeoffs (177.0) (6.0) Balance Sheet 6/30/98 6/30/97 Assets $280,777.0 $250,490.0 Deposits 57,026.0 56,977.0 Loans 31,029.0 28,734.0 Reserve/nonp. loans 712.70% 528.30% Nonperf. loans/loans 0.18% 0.36% Nonperf. assets/assets 0.21% 0.04% Nonperf. assets/loans + OREO NA NA Leverage cap. ratio 4.10% NA Tier 1 cap. ratio 7.60% NA Tier 1+2 cap. ratio 11.10% NA ===
