A spectacular profit report by Chase Manhattan Corp., and strong reports from Washington Mutual Inc. and Republic New York Corp., stirred talk Wednesday that the second quarter may have been a high-water mark for the industry.
On the heels of positive earnings reports from other megabanks, Chase's profits soared 30%, to $1.393 billion, and its operating earnings of $1.55 per share beat Wall Street's expectations by 18 cents. Washington Mutual Inc. late Tuesday reported net income up 14%, to a record $453 million. And Republic posted a 20% gain, to $143 million.
"Is it as good as it gets? I think so," said Bradley Ball, an analyst at Credit Suisse First Boston. "There is strength in market-sensitive sources of revenue," he said of Chase's results. "The businesses have shown good growth so far in 1999, but they will become more susceptible later in the year."
Marc J. Shapiro, vice chairman and head of finance and risk management at Chase, told analysts that the performance demonstrated the benefits of diversification, as revenues from market-related activities surged and the company posted double-digit gains in most of its wholesale and consumer businesses.
However, he and other Chase executives cautioned analysts not to expect the company to repeat the showing over the next couple of quarters, especially as investment banking and securities processing activities are projected to slow as 2000 approaches.
"We will not always have such a great quarter," Mr. Shapiro said. "But our goal is to deliver on the promise of the franchise. This was another step along the road."
Washington Mutual's report also left some analysts with the feeling that things cannot get any better. After a conference call in which management said its usual 15% growth rate may be hard to sustain, several reduced their targets for later in the year, despite indications that Wamu's mergers are paying off.
Chase Manhattan
The results at Chase, the nation's third-largest banking company, with $357 billion of assets, included $42 million in after-tax gains from the sale of branches in Texas and an office building in New York.
Total market-related revenues during the quarter rose 30%, to $1.8 billion, and made up nearly one-third of total revenues. In addition, fee income continued to grow. Fees rose 28%, to $3.47 billion.
As at other megabanks that have already reported second-quarter earnings, credit quality did not appear to be an issue, analysts said. Chase's nonperforming assets of $1.63 billion were flat from the first quarter and rose 18% from the year earlier.
"It was a great quarter," said Diane Glossman, an analyst at Lehman Brothers. "Credit quality was pretty benign."
In corporate banking, revenues jumped 13%, to $5.7 billion, and profits rose 25%, to $1.4 billion. Trading revenue totaled $733 million, an increase of 45% from the corresponding period last year.
Venture capital gains helped to bolster the results. Equity-related gains soared 39%, to $585 million and included strong returns from the bank's investments in StarMedia Inc., theStreet.com and other Internet ventures that went public during the quarter.
In addition, fees from investment banking activities rose 34% to $585 million. "We are confident about continued growth in investment banking," said Dina Dublon, Chase's chief financial officer. "The pipeline (for business) is very strong."
Consumer operations posted an 11% gain in revenues, to $2.2 billion and a 26% increase in profits, to $361 million. The bank said its national consumer services-as opposed to regional branch banking-contributed mostly to the gains.
Revenues from diversified consumer services, which includes mutual funds, insurance products, and auto finance, rose 35% over last year, to $292 million. Mortgage banking revenues rose 19%, to $291 million. Credit card revenues rose 20%, to $438 million, and credit quality in the portfolio improved to 5.80% of receivables from 5.94% last year.
Chase's third major business, securities processing and custody, showed revenue gains of 14%, to $777 million. The bank said the results reflected acquisitions last year, including a deal for the global custody portfolio of Morgan Stanley Dean Witter & Co.
Expenses rose 9%, to $2.97 billion.
Chase shares closed up 43.75 cents, to $81.3125.
Washington Mutual
The nation's largest thrift company matched the analysts' consensus of 83 cents per share, thanks in part to strong growth in fees for deposit accounts, insurance, and brokerage.
The completion of Washington Mutual's integration of H.F. Ahmanson & Co. during the quarter and strong overall results have laid the groundwork for the $175 billion-asset thrift to perform even better this quarter, analysts said.
"This past period really sets up Wamu to potentially have a very big third quarter," said James R. Bradshaw, an analyst at Pacific Crest Securities in Portland, Ore. "They are outstanding in several areas."
Fee income at Washington Mutual rose 11%, to $364 million, driven primarily by a surge in deposit account and other retail banking fees. The latter figure increased 35% compared to the year earlier, to $182 million. The company also increased securities and insurance fees and commissions to nearly $80 million, a 22% increase compared to the second quarter of 1998.
Washington Mutual's consumer finance operations also gave the thrift company strong earnings. The Aristar subsidiary reported second-quarter net income of more than $17 million, a 26% increase.
Analysts said that the strong improvement is due in part to the May 1998 hiring of Aristar chief Craig J. Chapman, a former Household Finance Corp. executive.
"When they bought that business it was doing 12% returns, now its at 16%, and they're suggesting 18% by yearend," said R. Jay Tejera, an analyst at Ragen MacKenzie Inc. in Seattle.
Analysts also were impressed that Washington Mutual added 78,000 checking accounts, though it was in the midst of converting Ahmanson accounts.
"For them to get that kind of growth without advertising in the quarter and during an integration is a very good sign that things are going smoothly," Mr. Tejera said.
Overall, loan originations were relatively flat, hovering at $13.6 billion. Single family home loan originations increased less than 3%, to $11 billion, compared to the year-earlier period. However, with the Mortgage Bankers Association predicting an industrywide 13% reduction in 1999 single-family originations, analysts were pleased at Washington Mutual's numbers.
"Anybody who comes up with flat numbers in this industry right now is doing a pretty impressive job," Mr. Tejera said.
Adding to the good news, analysts said, the mix of adjustable rate mortgages and fixed rates improved for the thrift company. In the second quarter, 66% percent of single-family home loan originations carried adjustable rates, compared to 48% in the year-earlier period.
Adjustable rate mortgages generate more income because thrifts tend to hold them in portfolio and earn interest income for the life of the loan, whereas fixed-rate loans are usually sold off.
"They are replenishing their portfolios with high-yielding loans, and that's good news," said Thomas O'Donnell, an analyst at Salomon Smith Barney in New York.
Washington Mutual also announced that its board has authorized a 30 million-share repurchase program. The authorization adds to an earlier 20 million-share buyback program; during the second quarter, the thrift company purchased 12.3 million of its own shares.
Despite the glowing reviews from analysts, several reduced their 1999 earnings estimates for Washington Mutual after a conference call with executives Wednesday morning. The thrift company told analysts that because of its rapid expansion in the past several years, its 15% annual per-share growth target will be harder to achieve.
Tightening spreads and a slowdown in the purchase of mortgage backed securities-which were being bought by Wamu when interest rates were lower to help counter the runoff in adjustable rate mortgages-will contribute to the slower earnings growth, analysts said.
"This will have a perverse short-term impact on numbers, but in the longer term everything still looks good," said Mr. Bradshaw, who reduced his 1999 earnings estimate by 6 cents, to $3.27 per share.
Washington Mutual shares closed down 93.75 cents, at $33.6875.
Republic New York Corp.
The company said it continued to restructure operations and prepare for its merger with HSBC Holdings Inc. this year.
The results included a $69.8 million gain from Republic's investment in Canary Wharf Group, a real estate concern in London. Without the gain, earnings per share of 98 cents beat Wall Street's expectations by 4 cents.
Analysts said the $51 billion-asset company was bouncing back from a difficult period. "They are definitely stabilizing," Ms. Glossman said.
In the third quarter of 1998, Republic suffered severe losses from positions in Russian bonds. In the first quarter it initiated a $104 million restructuring that aimed at cutting its exposure overseas and focusing on its historic strengths in private banking and certain niche corporate services like precious metals trading.
In a statement, Dov. C. Schlein, chairman and chief executive officer, said: "While we grow these businesses, we anticipate achieving additional savings."
Indeed, the company said $43 million of a $97 million charge in the first quarter had been spent to date, mostly on severance.
Fee income rose 42%, to $205 million. Fees from private banking and consumer financial services rose 4%, to $17 million.
HSBC agreed to buy Republic in May for $10.3 billion. The deal is slated to close in the fourth quarter pending regulatory and shareholder approval.
Republic shares closed up 43.75 cents, at $69.6875. +++
Washington Mutual Inc.
Seattle
Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98
Net income $452.7 $398.6
Per share 0.78 0.68
ROA 1.05% 1.02%
ROE 19.04% 18.02%
Net interest margin 2.74% 2.89%
Net interest income 1,148.7 1,089.7
Noninterest income 364.1 329.4
Noninterest expense 748.6 727.7
Loss provision 42.9 44.4
Net chargeoffs 59.0 42.0
Year to Date 1999 1998
Net income $896.8 $755.8
Per share 1.54 1.33
ROA 1.06% 1.01%
ROE 18.91% 18.11%
Net interest margin 2.76% 2.90%
Net interest income 2,275.9 2,150.0
Noninterest income 716.3 593.8
Noninterest expense 1,478.5 1,402.5
Loss provision 84.6 94.4
Net chargeoffs NA NA
Balance Sheet 6/30/99 6/30/98
Assets $175,041.4 $165,400.0
Deposits 83,125.3 85,500.0
Loans 110,913.0 NA
Reserve/nonp. loans 124% 107%
Nonperf. loans/loans 0.99% 1.32%
Nonperf. assets/assets 0.63% 0.89%
Nonperf. assets/loans + OREO NA NA
Leverage cap. ratio NA 6.08%
Tier 1 cap. ratio NA 10.66%
Tier 1+2 cap. ratio NA 11.80%
Republic New York Corp.
New York
Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98
Net income $143.1 $118.8
Per share 1.31 1.05
ROA 1.15% 0.80%
ROE 19.67% 14.77%
Net interest margin 2.60% 2.30%
Net interest income 271.2 268.4
Noninterest income 205.3 144.3
Noninterest expense 271.7 243.4
Loss provision 4.0 4.0
Net chargeoffs 4.6 3.9
Year to Date 1999 1998
Net income $189.6 $236.3
Per share 1.69 2.08
ROA 0.75% 0.80%
ROE 13.30% 14.96%
Net interest margin 2.56% 2.33%
Net interest income 528.5 528.6
Noninterest income 359.8 266.9
Noninterest expense 624.5 495.1
Loss provision 8.0 8.0
Net chargeoffs 8.7 9.4
Balance Sheet 6/30/99 6/30/98
Assets $51,179.7 $59,919.1
Deposits 32,429.4 34,220.6
Loans 14,193.8 13,816.4
Reserve/nonp. loans NA 335.90%
Nonperf. loans/loans NA 0.70%
Nonperf. assets/assets 0.13% 0.15%
Nonperf. assets/loans + OREO 0.49% 0.66%
Leverage cap. ratio 6.70%* 6.56%
Tier 1 cap. ratio 13.35%* 13.55%
Tier 1+2 cap. ratio 21.70%* 22.26%
* Estimated
Chase Manhattan Corp.
New York
Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98
Net income $1,393.0 $1,074.0
Per share 1.60 1.20
ROA 1.55% 1.15%
ROE 25.10% 20.10%
Net interest margin 2.98% 2.74%
Net interest income 2,150.0 2,045.0
Noninterest income 3,471.0 2,719.0
Noninterest expense 3,068.0 2,722.0
Loss provision 388.0 328.0
Net chargeoffs 634.0 614.0
Year to Date 1999 1998
Net income $2,566.0 $1,799.0
Per share 2.92 2.00
ROA 1.42% 0.97%
ROE 22.80% 17.00%
Net interest margin 3.03% 2.83%
Net interest income 4,358.0 4,214.0
Noninterest income 6,411.0 5,178.0
Noninterest expense 6,013.0 5,863.0
Loss provision 769.0 660.0
Net chargeoffs 1,283.0 1,226.0
Balance Sheet 6/30/99 6/30/98
Assets $356,868.0 $366,995.0
Deposits 209,502.0 207,091.0
Loans 171,487.0 165,076.0
Reserve/nonp. loans 238% 297%
Nonperf. loans/loans 0.85% 0.72%
Nonperf. assets/assets 0.46% 0.37%
Nonperf. assets/loans(1)+ OREO 0.81% 0.67%
Leverage cap. ratio 6.80%* 6.30%
Tier 1 cap. ratio 8.40%* 8.20%
Tier 1+2 cap. ratio 12.00%* 11.90%
* Estimated
(1) Plus derivative and Fx contracts ===
