Moving to put its Asian troubles behind it and complete other restructurings, J.P. Morgan & Co. sustained a 44% decline in first-quarter earnings.
The New York banking company reported Tuesday that its net income fell to $237 million from $424 million.
A $215 million restructuring charge covered the costs of a previously announced shift of capital from European and Asian operations to asset management and investment banking.
The pretax charge came as no surprise to analysts but it pushed earnings per share down to $1.15, 65 cents below Wall Street consensus estimates. The per-share figure was $2.04 in the 1997 quarter.
Morgan's decline contrasted with the gains of superregionals. First Union Corp.'s net was up 17%, to $587 million; Norwest Corp.'s rose 14%, to $368 million.
State Street Corp. was up 22%, to $106 million. PNC Bank Corp. improved by only 1%, to $269 million. It had a strong return on equity of 21.10%, but costs climbed. Noninterest expenses rose almost $100 million, or 15%, to $741 million, though the percentage was not out of line with that at other banks.
J.P. Morgan & Co.
Said David Berry, research director of Keefe, Bruyette & Woods: "The critical issue for Morgan is whether it will be able to find a merger partner or whether it will be able to deliver stronger performance on its own."
The $272 billion-asset company has been working to convince a skeptical Wall Street that its plans to control costs and boost productivity are paying off. Top executives held a conference call Tuesday to discuss the results with banking analysts for the first time in recent memory, according to the analysts.
Some $140 million of the restructuring charge paid for severance packages for 900 staff positions eliminated in the reorganization.
The restructuring is supposed to bring cost savings of $250 million beginning in the second quarter, the bank said.
"With the restructuring actions, we made tangible progress toward funding more of our growth through productivity gains," said Morgan chairman and chief executive officer Douglas A. Warner 3d.
Problems in the fourth quarter of 1997, when net income fell 35% from a year earlier, were mostly traceable to Asia, but analysts said the bank appears to have stabilized there.
Morgan reduced Asian credit exposure 25% during the first quarter, to $4.6 billion from $6.1 billion at yearend, through a combination of asset sales, chargeoffs, principal payments, and purchases of credit derivatives for hedging purposes. Net chargeoffs of $95 million occurred mainly in Asia.
The retrenchment in Asia, part of a broader reorganization plan, included the shutdown of Morgan's public cash equity businesses in the region. The bank said it has redeployed resources in Asia to focus on corporate restructuring, private equity, and trading in local markets.
Analysts said the bank's underlying results showed strong improvement from the fourth quarter. Without the charge, earnings per share of $1.80 would have met the analyst consensus.
"They are back to normal after all the problems in Asia," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co.
When the restructuring was announced in February, Mr. Warner said the goal was to get the rate of expense growth below the rate of revenue growth this year. But in the first quarter, expenses continued to rise faster.
Including the charge, expenses rose 37%, to $1.632 billion, over those in the first three months of 1997. Morgan attributed the gain to preparations for the year 2000 and the coming of the common European currency and to higher staff compensation. The overall revenues, $1.99 billion, grew 9%.
Analysts saw the expense-revenue imbalance as a weak spot. "While they have successfully built an investment bank, they have done so at the expense of shareholder value," said Bradley Ball, an analyst at Credit Suisse First Boston.
Good news, analysts said, was Morgan's gains in fee businesses, which made up 88% of the total revenues. Fees from client activities, including finance and advisory, market making, and asset management, jumped 21%, to $1.885 billion, compared with the first quarter last year.
First Union Corp.
Earnings per share of 90 cents beat consensus estimates by 2 cents.
The $172 billion-asset superregional's January acquisition of Wheat First Butcher Singer Inc., together with its own internal growth efforts, pushed fee income to $1.1 billion in the quarter. Of that, Wheat First generated $142 million, said Robert T. Atwood, Charlotte, N.C.-based First Union's chief financial officer.
"The story with us continues to be top-line revenue growth, fueled by our capital markets and capital management groups," Mr. Atwood said. Capital markets income jumped 59% from a year earlier, while capital management noninterest income grew 68%.
These gains, combined with a 4% decline in net interest income, pushed fee income to 46% of total revenue.
"You really see the impact from Wheat First," said Sally Pope Davis, a bank analyst with Goldman, Sachs & Co. "Their investment banking revenues were good by themselves as well."
Another quarterly highlight was credit quality. First Union's nonperforming assets as a percentage of net loans and foreclosed properties improved to 0.74% from 0.80%. Annualized net chargeoffs fell to 0.36% of average net loans from 0.63%.
The improvements follow the company's recent divestiture of part of its credit card portfolio.
"What they've been working on is really paying off and showing up in the numbers," said John Coffey, an analyst with Robinson-Humphrey Co.
Norwest Corp.
Norwest, which has $96.1 billion of assets, earned 47 cents a share, which hit the consensus estimate.
Though profits were up, Norwest said its consumer finance subsidiary, Norwest Financial, would probably earn 10% less in 1998 than it did in 1997. The company cited mounting credit losses in Puerto Rico and increased competition that has led to cut-throat pricing.
"Despite these conditions, we believe it is important to maintain our financial discipline and ride out the storm," said Richard M. Kovacevich, chairman and chief executive officer.
However, because of its diversity of businesses, Norwest said it was able to balance losses in consumer finance with gains in banking and mortgage banking.
Minneapolis-based Norwest said most of its income came from its banking group, which earned $264 million in the quarter, up 16.5% from a year before. Mortgage banking income soared 54%, to $52 million. Refinanced mortgage loans accounted for 57% of originations in the first quarter.
Net interest income increased 11.5% over the first quarter 1997, while noninterest income jumped more than 18%. Among the larger contributors were mortgage banking, trust and investment, and service charges on deposit accounts and insurance.
Noninterest expense was up 16%, to $1.2 billion, mainly due to increased salaries and benefits.
PNC Bank Corp.
PNC's first-quarter earnings were 87 cents a share, 1 cent better than analysts expected.
The $72.4 billion, Pittsburgh-based banking company benefited from a 24% increase in noninterest income, to $539 million. More than a quarter of the revenue came from asset management, while consumer service fees, mortgage banking, corporate finance, and mutual fund servicing made up the bulk of the other noninterest revenue.
"First quarter results reflect solid performance from our major businesses including significant growth in asset management, mutual fund servicing and mortgage banking," said Thomas H. O'Brien, chairman and chief executive officer. He added that fee-based businesses accounted for 46% of revenues, compared with 40% in the first quarter last year.
PNC's net interest income was $644 million, up 1% from the year-ago quarter. Credit card income was up 39%, to $26.5 million, but it was down 8% from the fourth quarter.
State Street Corp.
The $39 billion-asset State Street's robust results were boosted by revenues from processing, custody, and asset management.
Earnings per share of 64 cents beat the consensus by 2 cents.
Fee revenues jumped 24%, to $463 million, bolstered by a 62% gain in foreign exchange trading, to $75 million, and a 21% rise in fees from fiduciary services, to $347 million. The Boston-based bank attributed the increases to new and expanded business relationships at home and overseas.
State Street Global Advisors reported a 43% increase in assets under management, to $458 billion. Custody assets also grew 43%, to $4.4 trillion.
Expenses rose 21%, to $474 million, as a result of overseas expansion and investments in new technology. +++
J.P. Morgan & Co. Inc. New York Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $237.0 $424.0 Per share 1.15 2.04 ROA 0.34% 0.73% ROE 8.60% 15.70% Net interest margin 0.68% 1.01% Net interest income 336.0 450.0 Noninterest income 1,661.0 1,383.0 Noninterest expense 1,632.0 1,191.0 Loss provision 0.0 0.0 Net chargeoffs (94.0) (3.0) Balance Sheet 3/31/98 3/31/97 Assets $271,539.0 $226,382.0 Deposits 60,375.0 53,571.0 Loans 33,292.0 28,890.0 Reserve/nonp. loans 551.20% 618.70% Nonperf. loans/loans 0.24% 0.31% Nonperf. assets/assets 0.24% 0.05% Nonperf. assets/loans + OREO NA NA Leverage cap. ratio 4.00% NA Tier 1 cap. ratio 7.40% NA Tier 1+2 cap. ratio 11.00% NA
Norwest Corp. Minneapolis, Minn. Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $367.7 $321.9 Per share 0.47 0.42 ROA 1.69% 1.63% ROE 22.90% 22.70% Net interest margin 5.77% 5.62% Net interest income 1,078.7 967.2 Noninterest income 810.3 684.6 Noninterest expense 1,210.0 1,041.5 Loss provision 124.5 109.0 Net chargeoffs 131.4 112.0 Balance Sheet 3/31/98 3/31/97 Assets $96,093.7 $83,580.3 Deposits 57,832.5 52,025.5 Loans 42,162.4 40,369.4 Reserve/nonp. loans 592.10% 612.30% Nonperf. loans/loans 0.50% 0.43% Nonperf. assets/assets 0.27% 0.27% Nonperf. assets/loans + OREO 0.61% 0.55% Leverage cap. ratio 6.58% 6.36% Tier 1 cap. ratio 8.92% 8.81% Tier 1+2 cap. ratio 10.81% 10.58%
PNC Bank Corp. Pittsburgh Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $269.3 $266.3 Per share 0.87 0.80 ROA 1.51% 1.54% ROE 21.10% 19.48% Net interest margin 3.96% 3.98% Net interest income 644.2 637.3 Noninterest income 538.9 433.3 Noninterest expense 741.2 644.4 Loss provision 30.0 10.0 Net chargeoffs 90.0 60.0 Balance Sheet 3/31/98 3/31/97 Assets $72,355.0 $71,166.0 Deposits 46,068.0 44,902.0 Loans 54,511.0 52,575.0 Reserve/nonp. loans 320.96% 346.11% Nonperf. loans/loans 0.52% 0.61% Nonperf. assets/assets 0.46% 0.60% Nonperf. assets/loans + OREO 0.61% 0.82% Leverage cap. ratio 7.40%* 7.17% Tier 1 cap. ratio 7.70%* 7.66% Tier 1+2 cap. ratio 11.20%* 10.95%
* Estimated
State Street Corp. Boston Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $105.7 $86.4 Per share 0.64 0.53 ROA 1.07% 1.06% ROE 21.00% 19.90% Net interest margin 2.09% 2.22% Net interest income 176.0 150.0 Noninterest income 463.0 374.0 Noninterest expense 474.0 391.0 Loss provision 5.0 3.0 Net chargeoffs (1.0) 5.0 Balance Sheet 3/31/98 3/31/97 Assets $39,010.0 $33,631.0 Deposits 23,593.0 20,444.0 Loans 5,591.0 4,771.0 Reserve/nonp. loans 64.93% 12.00% Nonperf. loans/loans 0.02% 0.12% Nonperf. assets/assets 0.01% 0.02% Nonperf. assets/loans + OREO 0.06% 0.14% Leverage cap. ratio 5.90% 6.40% Tier 1 cap. ratio 13.60% 14.90% Tier 1+2 cap. ratio 13.70% 15.00%
First Union Corp. Charlotte, N.C. Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $587.0 $504.0 Per share 0.90 0.79 ROA NA 1.40% ROE NA 19.15% Net interest margin 3.88% 4.44% Net interest income 1,366.0 1,422.0 Noninterest income 1,149.0 817.0 Noninterest expense 1,508.0 1,283.0 Loss provision 90.0 162.0 Net chargeoffs 87.0 160.0 Balance Sheet 3/31/98 3/31/97 Assets $171,966.0 $148,442.0 Deposits 103,326.0 100,298.0 Loans 98,092.0 101,747.0 Reserve/nonp. loans 1.96% 2.12% Nonperf. loans/loans 0.64% 0.69% Nonperf. assets/assets 0.42% 0.55% Nonperf. assets/loans + OREO 0.74% 0.80% Leverage cap. ratio 6.53% 6.13% Tier 1 cap. ratio 8.56% 7.28% Tier 1+2 cap. ratio 13.46% 12.24% ===
