NEW YORK — Financial stocks rose Wednesday after JPMorgan Chase & Co.'s third-quarter results raised expectations for other big banks reporting in coming sessions; regional banks also increased despite lackluster traditional-banking results that could foreshadow similar results from them next week.
As the first of the major banks to report, JPMorgan posted strong investment banking results, but saw another large provision for loan losses as credit costs remain high and its credit-card unit swung to a loss. The bank said it saw earnings growth across commercial and retail banking.
JPMorgan shares were recently up 3.7% at $47.34 on heavy volume.
What happened to JPMorgan can be segregated into two core businesses - traditional banking versus capital markets, Rochdale Securities analyst Dick Bove said in an interview. Indicators in traditional banking are negative, with high unemployment and no real signs of improvement across the board in credit cards, auto loans or home mortgages, he said.
Retail banking revenue soared 66%, boosted by its acquisition of Washington Mutual, though net income in the segment dropped 89% because of the provision for credit losses.
"Since most regional banks in the U.S. only have that side of the business, you can expect 60% of regionals to report losses," Bove said.
Sanford C. Bernstein analyst Brad Hintz said regional banks that don't have the kind of capital-markets activity the big banks do are still in the stage of waiting for the economy to gain some traction before traditional banking begins to edge up.
Shares of regional banks were rising, though not as much as their larger counterparts, with SunTrust Banks Inc. up 2.1% to $22.47 and KeyCorp up 1.9% to $6.55.
Bove said because money is flowing into the capital-markets sector, issuance of debt securities soared and JPMorgan saw better underwriting of equities. We should expect to see those same trends in the other large banks such as Goldman Sachs Group Inc., which is set to report Thursday, and Morgan Stanley.
Those shares jumped 3.2% to $193.23 and 5.3% to $32.78, respectively. Citigroup Inc., which is set to report Thursday, rose 2.5% to $4.95.
Pali Research analyst Douglas Sipkin said JPMorgan's results are going to raise the expectations for the other investment banking businesses as fixed income was strong. He added there are still some commercial headwinds, though trends remained strong in investment banking through the beginning of October. At some point, JPMorgan expects investment-banking trends to get a little softer, but it doesn't seem that's happened yet, he said.
The third quarter marked the first time since JPMorgan bought collapsing Washington Mutual in September 2008 that assets and deposits didn't shrink, though loan balances continued to decrease as the recession took its toll on loan demand and the company rid itself of unprofitable loans. Chief Financial Officer Michael Cavanagh told reporters during a conference call that demand for lines of credit by business borrowers is at record lows.
Fundamentally, the fixed-income cycle will slow as the economy begins to gain traction, Bernstein's Hintz said. The recovery of fixed-income tends to happen in the depths of a recession when no more cutting can go on, while other portions, such as banking, mergers and acquisitions and equity underwriting, tend to pick up with rising corporate earnings and gross domestic product growth, he said.
JPMorgan's results basically also indicate that the Merrill Lynch acquisition by Bank of America Corp. last year "may have been the best acquisition Bank of America has ever made," Bove said. Assuming Bank of America's results follow the pattern established by JPMorgan — which saw investment banking revenue jump 85% as segment income more than doubled — the capital markets business, which is basically Merrill, should show huge profits, he said. Bank of America's shares rose 3% to $18.34 in recent trading.
Pure capital-markets companies like Lazard Capital and Greenhill & Co. should expect positive signs, Bove added.