Weak markets and a slowing economy wreaked havoc on bank earnings during the first quarter, and for J.P. Morgan Chase & Co. the timing could not have been worse.
Emerging from its first full three months as a combined company, Morgan Chase said profits fell 40%, to $1.2 billion, as the market slump took its toll on investment banking and asset management.
Regional banking companies also struggled with the economic downturn. KeyCorp said profits fell 41%, to $217 million, on losses in its brokerage and private equity units, and Wachovia Corp. provided more details on nonperforming loans and chargeoffs.
This week bankers have been cautious about the rest of the year, with report after report indicating the harsh effects of the slump in capital markets and lending. Executives at $714 billion-asset Morgan Chase said it all on Wednesday: Sustained weakness in the capital markets would hurt revenue growth, and as a countermeasure the company will keep costs even below previously discussed targets for the year.
The company would not give details, but said it might cut some jobs.
At a presentation Wednesday that began almost simultaneously with the Federal Open Market Committee's surprise announcement of a 50-basis-point cut in the Fed funds rate, Marc J. Shapiro, Morgan Chase vice chairman of finance, set the cautionary mood. "The Fed must know we're in a difficult environment," he said.
The combination of J.P. Morgan & Co. and Chase Manhattan Corp. was to create a global investment banking powerhouse. But the volatile markets have delayed that promise. "Just as you assemble this great global investment bank, the capital markets drop into low gear," said David Berry, director of research at Keefe, Bruyette & Woods. "It must be very frustrating."
Still, Morgan Chase managed to beat the most recent consensus estimate by four cents, with earnings per share of 70 cents.
Investment banking revenues fell 7%, to $4.5 billion, from the first quarter last year but rebounded 21% from the dismal fourth quarter. Investment management and private banking were the other dark spot, with revenues down 23%, to $807 million. Private banking is one of the areas targeted for job and expense cuts, said Dina Dublon, chief financial officer. "This is not a pretty picture," she said.
Private equity, which had a loss in the fourth quarter, had revenues of $57 million, 91% below the first quarter last year.
Retail banking gained 7% in revenues, to $2.6 billion on expense controls and growth in credit cards, the company said. Shares of Morgan Chase rose 8% on Wednesday, to $49.10.
KEYCORP
Earnings per share of 51 cents failed to meet the consensus estimate of 55 cents.
"Our results in the first quarter were affected adversely by a weakening economy," said Henry L. Meyer 3d, who took over as chief executive officer on Feb. 1.
The company's provision for loan losses was $110 million during the quarter, up 77% from the same period last year. Net loan chargeoffs totaled $109 million for the quarter, an increase of 76% from the first quarter last year.
Mr. Meyer told analysts during a conference call that most of the problem credits were in the company's commercial loan portfolio.
Analysts said the company's results indicate that a recovery is not coming soon. "While we had previously thought we could see a more meaningful rebound in earnings in the second half, we think this is now unlikely to occur until at least the fourth quarter," said Jennifer Thompson, an analyst at Putnam Lovell Securities Inc.
Fee income fell 24% from a year earlier, to $508 million. Fees from investment banking declined 15%, to $94 million, and fees from trust and investment services fell almost 3%, to $150 million.
Shares of KeyCorp fell 6.7%, to $23.45.
WACHOVIA
Wachovia Corp. announced preliminary earnings of $1.22 a share on Monday, the same day it announced plans to merge with Charlotte, N.C.-based First Union Corp.
On Wednesday, the company released a more detailed earnings account for the first quarter. Including $13.2 million in restructuring charges for the quarter, net income dipped 1%, to $242 million.
Nonperforming loans were down 28% from the fourth quarter, to $410 million. But net loan losses of $118.7 million in the period were up 26% from the fourth quarter and 62% from the first quarter last year. The company said the increases were expected.
Shares of Wachovia rose 2.5%, to $63.05.
SOUTHTRUST
SouthTrust Corp. in Birmingham, Ala., said profits rose 10%, to $130 million, or 76 cents a share, beating expectations by a penny.
Fee income rose 15%, to $351 million, driven by a 54% gain in mortgage banking fees from the first quarter last year. Origination was $900 million in the quarter, up 74%, but some 45% of that was related to mortgage refinancing. During the first quarter last year, just 20% of origination volume was related to refinancing activity.
Shares of SouthTrust rose 4%, to $45.98.
