Morgan Profit Up 79% On Gains from Trading

Bank of New York Net Falls 17%

The third-quarter earnings season of money-center banks got off to a strong start Thursday, sparked by big trading profits at J.P. Morgan & Co. and aggressive moves to dispose of bad assets at Bank of New York Co.

Morgan, the nation's fourth-largest bank company, said its income soared 79%, to $373 million, including a one-time gain of $32 million from the early retirement of debt. Even without the gain, earnings rose 64% over the year-earlier period.

The company's stock price rose $2.50, to $63.375 per share, a 52-week high.

Bank of New York, the 15th-largest U.S. bank company, said income fell 17% from the year-earlier quarter, to $58.8 million. But investors were impressed by the company's control of its credit problems. In trading on the New York Stock Exchange Thursday, the stock closed at $30.75, up $2.50 per share.


Trading profits at Morgan came in at a strong $396 million, up 32% from the third quarter of 1990 and 47% from the relatively strong second quarter of 1991. The company attributed much of the gain to trading in U.S. and foreign debt and equity.

Analysts, some of whom expected to adjust their earnings estimates on Morgan for next quarter and next year, said quick-witted Morgan traders had made money on the recent appreciation in Latin American debt in the secondary market.

Morgan attributed its gain to continued volatility in a variety of domestic and overseas markets. Earnings from foreign exchange trading were weak, but bonds and derivative products fueled profits.

Fees from corporate finance activity fell 10%, to $52 million, from one year ago, despite Morgan's elevated profile as an underwriter of debt and equity.

Analysts Upbeat

Analysts were nevertheless enthusiastic about the quarter.

"They exceeded my estimate and appeared very conservative in reporting the numbers," said J. Richard Fredericks, an analyst at Montgomery Securities Inc. Mr. Fredericks predicted that Morgan's stock price would rise to the high $60's within a year.

On an operating basis, Morgan earned about $1.40 per share, well above analysts' consensus estimate of $1.28 a share.

Some skeptics remain, however, believing that the company's stock price reflects full value. Brent Erensel of Mabon Nugent & Co. and Raphael Soifer of Brown Brothers, Harriman & Co., for example, said they would continue to rate the stock a "hold."

Sustainable Performance?

Others, like Judah Kraushaar of Merrill Lynch & Co., said they are not convinced that Morgan's stellar performance will be sustainable if markets stabilize.

The major negative in the quarter was a sharp rise in nonperforming loans, to $702 million, from $629 million at the end of the second quarter. Morgan said that nonperforming loans rose by $113 million -- including a $70 million loan to Columbia Gas System - but were partly offset by a $40 million decrease in bad loans to Third World countries.

Morgan's nonperforming loans are 2.5% of its total loan portfolio, while nonperforming assets are just 0.68% of total assets. Both are credit-quality numbers that analysts applauded. A bank spokesman said the company has no foreclosed real estate, the bane of most Morgan competitors.

Noninterest expense soared 21%, to $650 million, from the year-earlier period. Though analysts normally carp at rising expenses, they generally accepted Morgan's explanation that the increase largely reflected bonuses to traders and other employees.

Interest income grew 11%, to $1 billion, from the second quarter, fueled by falling interest rates. Morgan, which tends to benefit from a steep yield curve to a greater extent than most competitors because of its funding strategy, saw its interest margin rise by 14 basis points. The company also benefited from its collection of $17 million in interest on nonperforming loans to Brazil.

"They placed a bet on lower interest rates and won," said Mr. Soifer of Brown Brothers.

In addition to the $32 million gain from redeeming debt that carried a high interest rate, Morgan took at least two other one-time gains by recognizing a $55 million tax benefit and a $27 million gain on sales from its equity portfolio.


Sentiment about Bank of New York soared after the company reported that nonperforming assets fell sharply in the wake of loan sales and writeoffs. Investors had feared that the rate of increase in nonperformers would remain steady, a sign that the bottom had not been reached in loan deterioration.

The bank's net income of $59 million, or 72 cents per share, was below analysts' consensus estimate of 78 cents a share. But investors were encouraged by the $280 million decline in nonperforming assets, to $1.57 billion, or 5.3% of total assets.

Chargeoffs soared to $252 million, from $148 million during the second quarter, while Bank of New York's reserve coverage rose. Consumer chargeoffs for the first three quarters totaled $158 million, compared with $99 million in the comparable 1990 period.

Dennis Shea, an analyst at Morgan Stanley & Co., said Bank of New York also continued to reduce lending to Fortune 500 companies, where margins are thin. Loans since the third quarter of last year have declined 16%, he said.

The banking company aggressively disposed of highly leveraged loans and real estate during the quarter. It took a $27 million charge that partly reflected foreclosed real estate sales.

Separately, Bank of New York announced that it has rescinded the previously announced sale of its factoring business.

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