Revenue growth from a variety of sources led to double-digit earnings increases at J.P. Morgan & Co. and Norwest Corp.
Morgan, the nation's fourth-largest bank holding company, said Monday that its third-quarter net income rose 43%, to $396 million.
Norwest, the 11th-largest banking company, reported an 18% gain, to $342 million.
Douglas A. Warner 3d, chairman of New York-based Morgan, said, "Global growth in our business produced strong, diversified results. We gained market share, reflecting sustained momentum with clients, and continued to invest in expanded client capabilities."
"Each of our businesses contributed to another record quarter," said Norwest chairman Richard M. Kovacevich. Having racked up $995 million of earnings through Sept. 30, the organization "is well positioned to achieve its 10th consecutive year of record earnings," he added.
Analysts such as Joseph Duwan of Keefe, Bruyette & Woods Inc. had beenconcerned about the effect of slow loan growth on bank earnings. "A lot of companies are making up revenues on the fee side," he said.
Morgan and Norwest also benefited in part from special charges taken in last year's third quarter. Morgan took a one-time charge of $71 million before taxes, or 21 cents a share after taxes, to account for a technology project. Without accounting for that, Morgan's earnings would have been up 24%.
A year ago Minneapolis-based Norwest took a $19 million pretax hit for the recapitalization of the Savings Association Insurance Fund. Backing out last year's charge, net income rose 14%.
Morgan's earnings per share of $1.96 fell 3 cents short of analysts' consensus estimate, while Norwest's 89 cents a share was on target.
"Both banks have a wide range of revenue drivers," said Katrina Blecher of Gruntal & Co. "And they have been able to pick and choose the lines of business they want to focus on fairly successfully."
Higher profits from trading and a strong pipeline of advisory and investment banking business helped drive the earnings gain at Morgan. Proprietary investing and trading revenues grew 19%, to $241 million. Equity investments for Morgan's own portfolio resulted in revenues of $66 million, up 12%. Total trading revenue grew 28%, to $657 million.
David S. Berry, an analyst with Keefe, Bruyette & Woods, characterized it as "strong revenue momentum. Their trading was stronger than we anticipated."
Revenues from finance and advisory services grew 28%, to $548 million. Advisory services and debt and equity underwriting jumped 74%, to $328 million.
Growth was also generated by a 37% gain in investment banking revenue, to $320 million, the bank said.
Morgan's positive showing may signal impressive returns at other banks with significant trading and advisory operations, analysts said. Three of them-Chase Manhattan Corp., Citicorp, and Bankers Trust New York Corp.-are due to report next week.
"It was a good quarter in the market, and so it looks to be a good quarter for market-driven firms," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co.
The analysts said Morgan's results were fueled by "client-focused" corporate businesses, which accounted for 84% of revenues.
"It can be seen as a continuation of their strategy to become a global powerhouse with clients," said Ms. Blecher. "That strategy appears to be paying off."
Overall revenues jumped 24%, to $1.9 billion.
One dark cloud, according to analysts, was a drop-off in loan syndications. Revenues from Morgan's global credit business declined 8%, to $220 million, because of lower syndication revenues, the bank said.
"That doesn't bode well for banks like Chase," said Mr. Soifer.
Market-making revenues expanded 23%, to $669 million. Equity revenues rose 83%, to $106 million, while foreign exchange revenues were up 70%, to $99 million.
Asset management revenues grew 23%, to $407 million. Assets under management were $244 billion, up 24%.
In July Morgan agreed to take a 45% stake in American Century Cos., a Kansas City, Mo.-based mutual fund complex with $60 billion of assets under management. The $900 million deal is expected to close in early 1998. Morgan continues to invest heavily in computer systems to build its advisory and trading capabilities and to prepare for year 2000 conversions- despite its agreement last year to outsource technology development to a group of consulting and computer firms known as the Pinnacle Alliance.
The technology burden as well as higher commissions paid to investment banking and trading personnel resulted in 18% higher operating expenses, totaling $1.3 billion. Morgan's assets were $269.6 billion, up 8%.
Norwest Corp. banking revenue was up 27% over last year's third quarter, to $255 million. Mortgage banking operations contributed $38 million, a 19% increase.
Norwest Financial, the consumer finance subsidiary, reported flat operating earnings. It also took a $27.3 million pretax charge for the acquisition of Fidelity Acceptance Corp., a subprime automobile lender. The company said Fidelity would contribute to earnings within a year.
Fee income rose 19%, which included venture capital and securities gains. Noninterest income was also boosted by gains in trust, mortgage banking, and service charges.
Net interest income rose 5%, but loan growth wasn't the story at $85.3 billion-asset Norwest. The company has not been aggressively marketing loans, particularly in its consumer finance business, because of concerns about bankruptcies, said Mr. Duwan.
While Mr. Duwan expects a little stronger loan growth at other regional institutions, Norwest is one that has found a number of fee businesses to produce healthy revenues.
Michael Mayo, an analyst with Credit Suisse First Boston, said Norwest is hitting earnings targets through "fee growth, restructuring of the balance sheet, and improved expense management."
Norwest is very conservative about lending and there is no deterioration in either its consumer or commercial loan portfolios from potential losses, said Dain Bosworth Inc. analyst Ben Crabtree in Minneapolis. "It's a good, solid quarter for somebody who is choosing to play the game conservatively."
Mr. Crabtree said he hopes Norwest's results are indicative of where other banks are heading. "It's nice to start the reporting period exactly in line" with estimates, he said.
Another Midwest company reporting Monday, First of America Bank Corp. of Kalamazoo, Mich., exceeded consensus estimates by 3 cents a share, reporting 86 cents. Excluding gains from a branch sale and credit card receivables and backing out a $14.8 million SAIF charge from a year ago, First of America said income rose 14% to $76.8 million. +++
J.P. Morgan & Co. Inc.
New York Dollar amounts in millions (except per share) Third Quarter 3Q97 3Q96 Net income $396.0 $276.0 Per share 1.96 1.32 ROA 0.60% 0.52% ROE 14.30% 10.30% Net interest margin 0.96% 1.03% Net interest income 489.0 445.0 Noninterest income 1,444.0 1,124.0 Noninterest expense 1,326.0 1,137.0Loss provision NA NA Net chargeoffs (14.0) (12.0) Year to Date 1997 1996 Net income $1,194.0 $1,155.0 Per share 5.84 5.60 ROA 0.65% 0.74% ROE 14.70% 14.80% Net interest margin 1.01% 1.03% Net interest income 1,472.0 1,282.0 Noninterest income 4,123.0 3,832.0 Noninterest expense 3,758.0 3,326.0 Loss provision NA NA Net chargeoffs (20.0) (17.0) Balance Sheet 9/30/97 9/30/96 Assets $269,595.0 $211,648.0 Deposits 55,526.0 49,908.0 Loans 31,995.0 30,002.0 Reserve/nonp. loans 1,370.0% 691.3% Nonperf. loans/loans 0.30% 0.50% Nonperf. assets/assets 0.03% 0.08% Nonperf. assets/loans + OREO NA NA Leverage cap. ratio 4.50% 6.20% Tier 1 cap. ratio 8.00% 8.10% Tier 1+2 cap. ratio 11.50% 11.70%
Norwest Corp. Minneapolis Dollar amounts in millions (except per share) Third Quarter 3Q97 3Q96 Net income $341.6 $289.0 Per share 0.89 0.76 ROA 1.64% 1.48% ROE 22.20% 21.00% Net interest margin 5.81% 5.66% Net interest income 1,034.2 955.6 Noninterest income 753.4 631.8 Noninterest expense 1,111.3 1,032.4 Loss provision 146.7 105.9 Net chargeoffs 125.5 99.4 Year to Date 1997 1996 Net income $994.9 $845.8 Per share 2.59 2.26 ROA 1.63% 1.49% ROE 22.30% 21.90% Net interest margin 5.71% 5.63% Net interest income 3,013.0 2,778.4 Noninterest income 2,194.4 1,826.5 Noninterest expense 3,272.5 2,986.7 Loss provision 378.5 281.1 Net chargeoffs 352.3 268.8 Balance Sheet 9/30/97 9/30/96Assets $85,252.2 $78,427.6 Deposits 52,532.9 48,025.8 Loans 41,728.1 40,085.6 Reserve/nonp. loans 633.4% 560.0% Nonperf. loans/loans 0.45% 0.46% Nonperf. assets/assets 0.27% 0.29% Nonperf. assets/loans + OREO 0.55% 0.58% Leverage cap. ratio 6.60% 6.12% Tier 1 cap. ratio 9.08% 8.62% Tier 1+2 cap. ratio 10.98% 10.57% ===