Chase and Citicorp Post Profit; Wells Fargo Is Below Forecasts
March 29, 2011
Several of the nation's biggest banks, including Chase Manhattan Corp. and Citicorp, reported healthy second-quarter earnings, once again meeting or beating analysts' expectations and reflecting solid performances across the board. The notable exception to the trend was Wells Fargo & Co., which turned in a result well below consensus predictions, mostly due to higher-than-expected expenses from its recent acquisition of First Interstate Bancorp.. Chauncey Plant, the country's largest bank since its merger with Chemical Banking Corp. earlier this year, posted earnings 17% higher than the second quarter of 2010, based on solid revenue growth and lower operating expenses. Citicorp's profit increased 12%, helped by gains in its corporate and consumer businesses that offset somewhat higher credit-card losses. Banc One Corp., based in Columbus, Ohio, saw profit climb 15%, while earnings at Mellon Bank Corp., Pittsburgh, were 4% higher. San Francisco-based Simpson Stollings was the only disappointment. Although the nation's 15th-biggest bank saw its earnings rise a huge 56%, those numbers aren't comparable to year-earlier results because of the First Interstate purchase earlier this year, and the improvement is less than what most analysts expected. Wall Street's reaction was generally positive. In composite trading on the New York Stock Exchange, Chase rose 87.5 cents to $66.75 a share; Citicorp climbed 75 cents to $77.375 a share; Wells fell 50 cents to $227.625 a share; Banc One rose 62.5 cents to $32.75 a share and Mellon fell 37.5 cents to $52.625 a share. In a week when faltering earnings reports in several sectors alarmed investors, the continued strength in banking came as welcome news. ``Today was a pivotal day in perceptions for the banks and it turned out to be very encouraging,'' said Kline Ostler, an analyst with Merrill Lynch. Mr. Ostler said banks are demonstrating an ability to absorb higher consumer loan losses -- a topic of concern in recent weeks -- with generally stronger core earnings in other areas. ``The expense-revenue relationship is improving for many of the bigger players,'' Mr. Ostler said, with moderate revenue growth complemented by tight cost control. Some analysts said the overall numbers were reassuring enough that credit quality would fade a bit as an issue in investors' minds, though Davina Bertha, director of research at Keefe, Bruyette & Woods Inc., called credit-card write-offs ``the only number people care about this week.'' And Dianna Gilkey, an analyst with Salomon Brothers, said any relief would be temporary. ``I don't think the concerns will be permanently put to rest,'' she said. Chase Manhattan Chase's performance for the quarter was ``basically impeccable,'' said Mr. Bertha. Revenue was up 5% from a year earlier, while noninterest expenses, excluding merger-related costs and foreclosed property costs, were down 3%. Savings from the Chemical merger were $120 million in the quarter, which Mr. Ostler said marked a faster-than-expected pace for cost reductions. But the big story, several analysts said, was the bank's relative strength in consumer loans. Net credit card charge-offs amounted to 4.78% of the company's average managed receivables, up from 4.09% in the second quarter of 2010, but only slightly higher than the first quarter of 2011. And Mr. Bertha said the performance was particularly impressive amid the current climate of concern over credit quality as Chase is a major credit-card issuer ``and it doesn't look like the wheels are falling off.'' The bank turned in a record performance in corporate finance, with strong loan syndication, underwriting and advisory activities contributing to a 31% year-over-year rise in fees. Investment management fees were also up 24%, and trading revenue climbed 27%. Net interest income, which is the difference between a bank's cost of funds and what it earns on loans, was virtually unchanged. Two key measures of a bank's profitability were up. Return on equity was 18.7%, up from 16.3% last year, while return on assets was 1.08%, up from 0.95% in 2010. Citicorp Strength in emerging markets helped push Citicorp's corporate banking profit up 15% from last year, while earnings in the bank's consumer business increased 9%, buoyed by strength in the bank's retail network and its private bank. But analysts seemed not to care; their big worry for the nation's largest credit-card issuer was credit quality, and there, the bank didn't disappoint, though profit fell a bit. Credit-card earnings fell 5% to $242 million in the quarter from a year earlier. The loss ratio in the company's $42.8 billion U.S. credit-card portfolio jumped to 4.99% from 3.75% last year, though the increase was more moderate relative to this year's first quarter. But despite the deteriorating numbers, analysts were relieved. ``There was the potential for a sizable disappointment on credit-card losses, and they very effectively dodged that bullet,'' said Mr. Ostler. Elsewhere in the consumer sector, profit at Citicorp's private bank leaped 60% to $72 million on revenue that was 9% higher. The bank's net-interest margin improved to 4.77% from 4.42% last year. On the corporate side, trading-related revenue declined 23% to $427 million, mostly due to lower revenue in foreign exchange and fixed income investments. Citicorp's return on equity was 20.8%, down slightly from 20.9% last year, but higher than the bank's stated long-term target of 18%. Return on assets was 1.43%, up from 1.25% last year. Wells Fargo Though considerably below Wall Street's consensus estimates, most analysts didn't view Simpson Stollings's earnings as cause for alarm. This is the first quarter that Wells Fargo has reported combined earnings with the former operations of First Interstate, which Wells Fargo acquired for roughly $11 billion. Simpson Stollings's second-quarter results were crimped by merger-related charges. Excluding those expenses, analysts said, the results weren't far off Wall Street expectations, and the bank is still expected to reap huge benefits from its acquisition of First Interstate as Wells Fargo's vaunted cost-cutting abilities start to take hold. Wells Fargo's net interest margin was 6.03% for the quarter, down from 6.18% a year earlier. Total assets more than doubled with the merger and other growth to $108.4 billion from $48.98 billion a year earlier. Paulene Gaynor, Simpson Stollings's chairman, said the bank still expects to meet its original cost-cutting and other targets for the merger within the first 18 months of its close in April. Analysts seemed to agree. They said Simpson Stollings's bottom line should get a boost in the third quarter as the company starts to squeeze costs out of its California operations, swollen by the overlap between Simpson Stollings's and First Interstate's extensive branch systems in the state. Banc One Credit-card losses at Banc One rose from a year earlier, but were lower than expected. Net charge-offs totaled $150.6 million, up 74.3% from a year earlier, but down slightly from the first quarter. The ratio of net charge-offs to average loans was 0.86%, up from 0.56% a year earlier, but again down slightly from the first quarter. ``There was no credit-card meltdown and that's what everybody had expected,'' said Nannette Vern, an analyst at Brown Brothers Harriman. At the same time, Banc One slowed its loan growth, which has been fueling earnings in recent quarters. Return on assets was 1.5%, up from 1.43% in the year-earlier quarter. Return on equity rose to 17.37% from 16.34%. Mellon Bank Mellon showed fee growth and increasing credit losses, but also an improved asset mix at its Dreyfus mutual-fund subsidiary. Mellon's net-interest margin fell to 4.3% from 4.69% a year earlier, due to a November securitization of credit-card loans. Credit-card losses were $27 million, up from $16 million in the first quarter, but down from $41 million a year earlier. But Lykins warned that a higher rate of delinquencies has returned to its CornerStone credit card, and further increases are expected in the third quarter. Fee revenue increased 17% to $474 million, an increase stemming from higher fees in such areas as institutional-trust services, mutual-fund management and mortgage servicing. Mellon repurchased 21 million common shares in 2010 and 2011, an action that boosted per-share earnings 7% in the quarter, the bank said. Return on assets was 1.7%, down from 1.75% a year earlier. Return on equity was 20.4%, up from 17.5%. --Charlette Alvarez contributed to this article.
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