Three more regional banking companies reported solid gains in profit Tuesday, further emphasizing that companies with market-related businesses are faring better than traditional institutions that rely on income from lending, where signs of weakness again emerged.
- Wells Fargo & Co. profits rose 14%, to $1 billion, with the aid of big gains from venture capital investments as well as strong loan growth.
- Mellon Financial Corp.'s net income fell by a fraction of a percentage point, to $253 million. Discounting a one-time gain on the sale a credit card unit last year, Mellon's net income rose 10%.
- State Street Corp. said profits jumped 24%, to $149.6 million, both because of double-digit revenue gains from asset management and other securities services. All three beat the consensus estimates of Wall Street analysts.
There were some new soft spots in the day's reports. Bank One Corp. profits plunged 40% from the first quarter of last year, to $689 million, reflecting a steep decline in revenues from credit card operations. That report was expected and matched the analyst consensus.Amsouth Bancorp fell slightly short of expectations. Profits were essentially flat from the same period last year, at $138.9 million, because of merger-related charges and declining revenues from mortgage operations.
"The lesson today is that it's really good to have fee-generating businesses," said George Bicher, an analyst at Deutsche Banc Alex. Brown.
Bank One Corp.
Earnings per share of 60 cents matched the consensus target, which has been steadily lowered after repeated warnings by the $273 billion-asset Chicago banking company of declining profitability in its First USA Inc. credit card unit.
The combination of declining card revenues and the sale of some consumer lending operations during the quarter slashed fee revenues by 29.7%, to $1.8 billion.
As promised, Bank One's credit card income took a nosedive, falling 77%, to $70 million. Revenues from card operations fell 38%, to $578 million. Net chargeoffs declined to 5.78% of receivables, from 6.52% in the fourth quarter, but were up from the 4.89% reported for the first quarter of last year.
Card customers continued to leave the company in droves during the first three months of this year. Bank One said it had 56.4 million card customers, down 12% from the end of the fourth quarter and 13% from the first quarter last year. Average card receivables declined 3%, to $67.1 billion.
Analysts said the results, though meeting expectations, did not indicate signs of a turnaround in the card business anytime soon. Bank One recently hired James Dimon as its chief executive officer with the hope the former turnaround artist for Travelers Group, who was later named president of Citigroup, could accomplish just that.
"Credit cards continue to suck the life out of the company," said Michael Mayo, an analyst at Credit Suisse First Boston. "They have a way to go."
Other business lines had double-digit gains in income, fueled by strong loan demand, capital markets gains, and expense cuts.
Commercial banking fee revenues rose 24%, to $721 million, and profits for the group rose 47%, to $464 million. Loans grew 3% from the fourth quarter and 12% from the first quarter of last year, to $89.7 billion. Venture capital gains of $143 million were 50% higher than last year.
Retail banking fee revenues fell 20%, to $364 million, but profits for the group rose 10%, to $274 million. The decline in revenues largely reflects a $36 million increase in realized losses from the company's auto leasing business, without which revenues gained 10%, Bank One said.
Consumer loans grew 6.5% from the fourth quarter and 15% from a year ago, to $73.3 billion.
Expenses fell 9%, to $2.66 million. Bank One cut 5,100 jobs in the quarter, many of them administrative and staff functions at Wilmington, Del.-based First USA.
Bank One shares rose $1.5625, to close at $31.8125.
Wells Fargo & Co.
Earnings per share of 61 cents beat the consensus by a penny.
The $222 billion-asset San Francisco-based company topped the $1 billion market in profits for the first time. Wells Fargo said the results spoke to its greatly increased size and diversity since Minneapolis-based Norwest Corp. since bought the old Wells in November and took its name.
Like Bank of America Corp. and Citigroup, Wells reported huge gains from its venture capital investments. Profits from the business were $885 million in the quarter, even higher than the surprisingly strong fourth quarter, when Wells had a $721 million gain from venture capital. This time the gain was driven mostly by the sale of a stake in the communications equipment provider Siara Systems.
Wells said it used the gain to offset $602 million of securities sales from the restructuring of its investment portfolio towards higher-yielding securities and a $160 million writedown of auto lease residuals.
Noninterest income rose 11%, to $1.9 billion. "Venture capital is a core competency, but it's not a significant ongoing business," said Catherine Murray, an analyst at J.P. Morgan Securities.
Indeed, retail and wholesale banking continued to be the main revenue drivers for the company.
Income from retail banking jumped 16%, to $721 million. The bank attributed the gain to increased cross-selling efforts and better customer service. Total consumer loans rose by 12%, to $36 billion.
Income from wholesale banking rose 14%, to $252 million. Commercial loans grew 16%, to $41 billion.
Net interest income, boosted by revenue gains in commercial real estate lending, rose 8%, to $2.5 billion; total loan balances increased by 15%, to $125 billion. Deposits grew 7%, to $142 billion.
Growth in key areas such as loans means that "business focus has increased and momentum is showing," Ms. Murray said.
Revenues from deposit account fees rose 11%, to $383 million, and income from trust and investment fees rose 20%, to $360 million, though that gain was partly due to a change in accounting procedure, said Ross Kari, chief financial officer during a prerecorded conference call Tuesday. Income from credit card fees dropped 7%, to $123 million, and that decline was also due to a change of accounting in its merchant card business.
Noninterest expenses expanded 6%, to $2.5 billion, primarily due to nonrecurring items relating to conversion of Norwest and Wells Fargo. Wells also closed six small bank acquisitions, with combined deposits of $2.5 billion, late in the quarter, and the full impact of those purchases has yet to be felt, Mr. Kari said.
Wells Fargo shares rose $1.4375, to close at $40.8125.
State Street Corp.
Earnings per share of 92 cents were enough to beat the average estimate of Wall Street analysts by a nickel.
A strong market in the first quarter lifted revenues at State Street's two main businesses, securities processing and investment management. Total revenues rose 24%, to $930 million. Fee revenues rose 27.7%, to $705 million.
"It was a stunning amount of growth," said Nancy Bush, an analyst at Prudential Securities.
The $60.7 billion-asset Boston company shed the last vestiges of its commercial banking operations last year, selling them to Providence, R.I.-based Citizens Financial Group. State Street is now focused exclusively on services for institutional investors.
At the time of that transaction, the company had warned that the impact from the absence of income from commercial banking might be felt for three years. "We were too conservative with that," said Ronald O'Kelley, chief financial officer. "It appears to have taken three months."
Fees from custody and other administrative and accounting services rose 27%, to $349 million, reflecting asset growth and new business, the company said. Total assets under administration reached $6.2 trillion.
Fees from investment management rose 36%, to $181 million. Total assets under management ballooned 27% from the same period last year, to $720 billion.
Revenues from servicing and processing institutional trades rose 37%, to $62 million, boosted by the company's equity brokerage operations. Foreign exchange fees also rose, 13%, to $106 million.
State Street shares rose $7.3125, to close at $97.50.
Mellon Financial Corp.
Earnings per share of 50 cents beat the estimate by a penny.
The $47 billion-asset Pittsburgh banking company has spent several years building up its asset management and other market-related businesses and has recently begun to get out of businesses in which it said it was not large enough to compete.
Fee income in the first quarter declined 8%, to $798 million, reflecting the impact from sales last year of Mellon's credit card, network services, and mortgage banking businesses. Excluding the impact of the sales, Mellon's fee income rose 13% on the strength of its trust and investment businesses.
Trust and investment fees rose 17%, to $578 million. Mellon's asset management subsidiaries, including Dreyfus Corp. and Newton Management Ltd. in the United Kingdom, pushed investment management revenues up 17%, to $324 million. Assets under management grew to over $500 billion.
Income from administration and custody activities rose 18%, to $173 million. The company noted that second-quarter fees from its mutual fund and administration custody business would be impacted by the expiration of a third-party contract which contributed $24 million in pre-tax fees in the first quarter.
Operating expenses fell 5% to $738 million.
Mellon shares rose $1.25, to close at $32.50.
Excluding a charge relating to its October 1999 purchase of First American Corp., the company earned $152.4 million, or 39 cents per share, missing Wall Street estimates by a penny.
Amsouth said its integration of First American - which nearly doubled the size of the company - is on track, adding that it expects to see $100 million in cost savings from the deal this year. About 225 of First American's 339 branches have been converted, with middle and western Tennessee and Kentucky remaining.
C. Dowd Ritter, president and chief executive officer of the $43.6 billion-asset Birmingham, Ala., company, said in a statement that the report "closely approximates our aggressive growth goal of 12% to 15%, while our return on equity of 20.8% is well within our targeted range."
But others were not so sure. Christopher Marinac, an analyst with Robinson-Humphrey Co. in Atlanta, said he was "not overly impressed" with the results. "I think these numbers are indicative that there is customer runoff from the merger," he said. "Investors have been skeptical, and there is nothing in this earnings report that looks that impressive."
Total loans rose 8.9% to $26.7 billion, while deposits were flat, at $27.8 billion. Fee income grew by 8.5% over last year, to $220 million, despite a 20% decline in mortgage income, to $10.1 million. Fees for consumer investment services rose 24.6%, to $64.6 million.
Expenses dipped 1.2%, to $333 million.
Nonperforming assets totaled $145.5 million, up from $131.2 million last year but down from $161.5 million at yearend. The allowance for loan losses, which was $363.5 million, held steady from yearend and was down slightly from $366.2 million a year earlier.
Peyton N. Green, an analyst with Sterne, Agee, & Leach in Atlanta, said he is taking a wait-and-see approach on the stock. "The momentum they had is gone, which was bound to happen because of the acquisition," he said.
Amsouth shares rose $1.25, to close at $14.625.
Liz Moyer, Laura Mandaro, and Lou Whiteman contributed to this report. For earnings tables and other data, go to the Ranking the Banks section of americanbanker.com.
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