Money-center banks shook off the effects of rising interest rates in February and March, posting a solid rebound in trading revenues during the first quarter.
The strong results reported by J.P. Morgan & Co. and Bankers Trust New York Corp. helped the group to generate revenue double that of a year ago.
Bankers Trust, which posted a $78 million loss a year ago, was in the black again with $247 million in first-quarter trading revenue.
"Just about everybody had a good January," said Art Soter, an analyst with Morgan Stanley & Co. "The month of March is what tipped the scales for everybody one way or another."
Rising interest rates during March and late February reportedly hurt results.
Traders say dealers in American-style swaptions embedded in callable notes issued by government agencies were selling options to hedge their positions in these notes.
An American-style swaption on these notes gives the issuer an option to enter into an interest rate swap at any time after a preset period. When rates rise, the issuer is less likely to call the notes to refinance at higher costs. As a result, the option is available to the issuer for a longer time, adding to the volatility of the dealer's portfolio.
If some banks were stung in this market, gains on other transactions offset their losses. "There have been so many cross-currents that it would have provided plenty of opportunities for somebody to make up any losses if they got caught," said Raphael Soifer, a Brown Brothers Harriman analyst.
J.P. Morgan & Co., one of the largest dealers in this agency market, reported a 150% jump in its trading income for the quarter, with $758 million. A year ago, the bank reported $303 million from trading.
Of J.P. Morgan's first-quarter total, the bank's fixed income trading group accounted for $533 million, a ninefold increase over a year ago, and more than double the group's $248 million fourth-quarter performance.
BankAmerica Corp.'s trading results were 28% higher than a year ago. The bank's corporate-driven trading business helped the bank post trading income of $165 million for the quarter, compared with $129 million a year ago.
The new Chase Manhattan Corp.'s $339 million in trading profits represented the combined results of Chase and Chemical.
"Chase's results are hard to read, because they don't reflect any synergies of the deal,"Mr. Soter said. "There is reason to believe the combined entity would have done better than the separate companies did."
Among the poorer performers in the group were Citicorp and First Chicago NBD Corp. During the quarter, Citicorp's large foreign exchange trading desk posted a decline of $55 million - or 20.8% - to $210 million.
Likewise, First Chicago NBD posted a decline of $4 million, or 3.6%, in overall trading and gains on equity and investment securities during the quarter.