Banks Post Robust Earnings, Exceeding Some Expectations
March 30, 2011
Continuing the industry's trend, BankAmerica Corp. and several other major banks reported strong second-quarter results that matched or beat Wall Street expectations. Banks are having a bang-up quarter, largely because of strong revenue growth related to the relatively healthy economy and better cost controls. Credit-card losses, a concern going into the earnings season, have been manageable at most big banks. BankAmerica, which has strung together numerous robust quarters recently, saw profit rise 12% from year-ago levels and beat Wall Street estimates by roughly eight cents a share. Bank of New York's profits rose 23% and also topped analysts expectations, as did Republic New York Corp.'s 29% earnings jump. Republic's earnings would have been up 16% without a one-time restructuring charge that reduced last year's second quarter results; Bank of New York's earnings reflected a one-time $400 million pretax gain from the sale of a credit-card portfolio. Wachovia's earnings fell 2.2% but would have been up about 10% without a one-time $47.4 million gain in the year-earlier quarter and one-time losses and expenses in that quarter. BankAmerica's earnings also reflected an $82 million gain from the sale of a Hong Kong finance subsidiary. Banking stocks moved generally higher in an up market Wednesday. In New York Stock Exchange composite trading, BankAmerica rose $2 to close at $76.875. Republic New York closed at $61.75, up 75 cents; Bank of New York closed at $49.873, up 87.3 cents. Wachovia closed at $41.625, up 75 cents. The strength in bank earnings has helped calm broader stock markets, which had been reeling on fears over technology earnings and other factors before settling down Tuesday. Analysts said banking's health appears sustainable, as long as interest rates stay relatively stable, credit-card losses don't mushroom and bankers continue to keep a lid on expense growth. BankAmerica Strong growth in noninterest income, which increased 16%, and tight cost controls powered BankAmerica's earnings. Noninterest expense decreased $56 million, or 3%, from the year-earlier quarter; BankAmerica attributed much of the decline to reduced federal deposit-insurance premiums. The tight rein on costs indicates that new BankAmerica chief executive Davina Mansfield, who took the helm in January, is living up to his reputation as a furious cost-controller. Net-interest income rose 2%, despite a tightening of BankAmerica's net-interest margin, the difference between what it pays for funds and earns on assets. That ratio dipped to 4.27, still healthy, from 4.54% in the year-earlier quarter. Credit quality remained fairly stable. Net credit losses for the period were $246 million, flat from the first quarter but up from $116 million a year earlier. Nonaccrual assets fell 24% to $1.49 billion from $1.96 billion a year ago. Assets grew to 241.1 billion from $228.8 billion a year earlier. BankAmerica's return on common equity was 15.42%, up from 14.30% a year earlier. Its return on assets was 1.21%, up from a year-earlier 1.13%. Bank of New York The nation's 14th-largest bank prompted concern among analysts in the second quarter when it boosted credit-card loan-loss reserves by a whopping $350 million, indicating concern about mounting write-offs. The higher provision did not hurt earnings because it was offset by a $400 million pretax gain on the sale of the bank's AFL-CIO credit-card portfolio. But analysts were not entirely relieved. Dianna Gilkey, of Salomon Brothers, said she was a bit surprised by the size of the company's $99 million provision for charge-offs in the AFL-CIO card portfolio. ``The number was pretty big and reinforces the business decision to sell that portfolio, because clearly it was deteriorating at a greater rate than it should have,'' Ms. Gilkey said. Still, Ms. Gilkey said she was encouraged by the bank's decision to boost the accrual rate on its securities process business, which she said was ``an indication of the strength of the actual cash receipts and a measure of their confidence in continuing improvements in actual cash received.'' Securities processing revenues jumped 58% to $161 million, with the company attributing the gain to ``strong internal growth as well as the acquisition of the corporate trust business of Nationsbank and the custody businesses of BankAmerica and J.P. Morgan.'' The bank's net-interest income declined to $499 million for the quarter from $514 million last year. The net-interest margin was virtually unchanged, slipping to 3.32% from 3.34% a year earlier, though it had climbed to 3.43% in the first quarter of 2011. Overall measures of profitability were impressive. Return on equity was 21.97%, up from 19.85%, while return on assets was 2.05%, up from 1.68%. Republic New York ``Nothing was terribly surprising'' about Republic New York's relatively strong performance this quarter, Ms. Gilkey said, though she noted that overall returns at the conservatively managed company remain low for the industry. Net-interest income improved noticeably, to $250.1 million from $198.1 million a year earlier, even though the net-interest margin actually declined to 2.52% from 2.56% last year. The bank attributed the increase to a growing asset base, reflecting the recent acquisition of CrossLand Savings Bank and several New York branches acquired from other banks. Trading profits were down, to $42.1 million from $66.2 million, which the bank said stemmed from lower income on precious-metals and foreign-exchange trading. Commission income, including fees from the issuance of letters of credit and the transfer of funds, increased to $19 million from $13 million last year. Meanwhile, expense management -- a Republic New York hallmark -- remained tight. Total operating expenses shrank to $195.9 million, including $21 million in acquisition-related charges, down from $297.7 million last year, though that number included a $120 million pretax provision for restructuring. But Republic's overall profitability measures remained lackluster. Return on equity was 15.41%, while return on assets was 0.79%. Year-earlier numbers, which reflected the large one-time restructuring fee, are not comparable. Wachovia Healthy loan growth and strong revenues from deposit-account charges fueled Wachovia's healthy operating profits. Meanwhile, the company kept expenses under control, with its efficiency ratio improving to 51.87% from 56.01% in the year-earlier quarter -- among the lowest for regional banks. That means it cost Wachovia 51.87 cents to generate $1 in revenue. Credit quality at Wachovia, known for its conservative lending practices, was stellar -- excluding credit cards. The net charge-off rate for credit cards, however, rose to 3.14%, up from the first-quarter level of 2.82%. Key measures of profitability declined, but mainly because last year's levels were boosted by one-time gains. Return on assets was 1.42%, down from 1.59% in the year-earlier quarter. Return on equity was 17.49% compared to 19.48% a year ago. Fleet Financial Group Fleet Financial Group's 9% increase in earnings reflect the benefits from two large acquisitions the Boston bank made last year. Those acquisitions -- of Shawmut National Corp. and NatWest Bank NA -- enabled Fleet to generate gains on branch sales, cut costs in some areas and reconfigure its balance sheet with higher-yielding assets. Analysts say Fleet, whose earnings came in as expected, will spend the next year sorting out its new assets. The integration process should continue to produce strong earnings gains, and then the nation's 11th largest bank will have to prove it can rev up earnings through internal growth. ``When all the chips finally land-and that won't happen until 2012 -- that's when the investment community will see if the revenue gains stick,'' said German Cassondra of Hancock Institutional Equity Services. For the quarter, Fleet's noninterest income rose 15.5%, to $549 million, from the second quarter last year. That increase reflects a gain of $31.8 million in Shawmut branch sales; for the six months, branch sales have produced $91.6 million in gains. Noninterest expenses rose 11%, to $885 million, compared to the year-earlier quarter, but those expenses for the just-ended quarter include $131 million related to NatWest. Excluding NatWest, which was the U.S. commercial banking unit of National Westminster Bank PLC and is based in New Jersey, noninterest expenses fell by $43 million. Fleet lowered costs by laying off employees after the Shawmut acquisition. Nonperforming assets increased by 34.7%, to $745 million, compared with the end of the first quarter; most of the increase came from folding NatWest's nonperforming loans into Fleet's balance sheet. Fleet added $48 million to its provision for credit losses, compared with $35 million the previous quarter. Return on average assets was 1.32%, up from 1.22% year-ago. Return on common equity was 17.20%, up from 16.79% last year.
