Capital markets revenue lifted the earnings of the nation's largest banking companies in recent quarters, and analysts say the trend is likely to continue in second-quarter reports.
Several analysts said they expect good earnings growth from the four New York investment banking companies, whose fiscal second quarter ended May 31. All four - Goldman Sachs Group Inc., Lehman Brothers, Morgan Stanley, and Bear Stearns Cos. Inc. - are expected to report results this month. Wall Street generally uses those results to predict what Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. will report for their brokerage, investment banking and asset management businesses a month later in their second-quarter reports.
One question mark is whether the volatility of recent weeks persists in the equity markets, analysts say.
If the equity market remains stable, the three commercial banking companies "should have pretty good year-over-year improvements" this quarter, said Jeffery Harte, an analyst with Sandler O'Neill & Partners LP.
Richard X. Bove of Punk, Ziegel & Co. was even more bullish. "My sense is that the business was superb, and JPMorgan and Citi participated as much as anybody else," he said. Mr. Bove also said that he does not expect this month to spoil the results.
In a report issued Friday, Mr. Harte wrote that he expects Goldman, Lehman, Morgan Stanley, and Bear Stearns to report an average earnings increase of 84% for the fiscal second quarter from a year earlier. However, he expects an 8% decline in per share earnings from the first quarter.
In a note issued Friday, Michael L. Mayo of Prudential Equity Group Inc. was also optimistic about the group's earnings. However, he saw some downsides: "The main areas of weakness are likely to be asset management, which gets hurt from lower stock markets, and potentially certain cash-trading businesses."
Both Mr. Mayo and Mr. Harte say that a slower equity market would only hurt earnings when it spills over in the fixed income market and merger and acquisition activity. However, Mr. Mayo, Mr. Harte, and Mr. Bove have said the spillover hasn't happened yet.
However, Mr. Harte said that much of the recent weakness has come from the emerging markets, which makes up a significant part of Citi's business.
During his presentation Thursday at a conference sponsored by AllianceBernstein Holding LP's Sanford C. Bernstein & Co. LLC, Citi chairman and chief executive Charles O. Prince spoke with pride about his $1.6 trillion-asset company's international investment banking business.
But he also said that Citi has expanded its equity and derivative businesses and investment banking in the United States and elsewhere. "Now I am enormously proud of what we have done here."
Citi's first-quarter investment banking earnings rose 15%, to $1.9 billion. JPMorgan Chase generated first-quarter earnings of $850 million from investment banking, down 36% from a year earlier, when trading revenue was exceptionally strong.
For the second quarter of last year the $1.3 trillion-asset company reported only $611 million of investment banking income. "April and May were tough" for market revenue last year, so the year-over-year comparison this year should be favorable, Mr. Harte said.
