US banks’ profits up, but speed bumps may lie ahead

NEW YORK: Large US banks have been stand-outs in the early part of the second-quarter earnings season, but analysts warn of speed bumps ahead.

Major banks have posted big profit increases that bested analyst expectations.

They gained from better credit quality, the absence of heavy provisions that had marred prior quarters, and strong investment banking.

That said, loan growth remained anaemic, particularly to consumers, who continue to skimp on spending.

Banks also face tough ques- tions on the implications of higher interest rates and new proposed regulations to require higher capital buffers. And some analysts are sceptical the recent jump in profits is sustainable.

JPMorgan Chase chief executive Jamie Dimon said loan growth remained “soft”, citing the “cautious stance” by consumers and businesses.

“However, we continue to see broad-based signs that the US economy is improving and we are hopeful that, as jobs are added and the confidence builds, the US economy will strengthen over time.”

JPMorgan posted a 31 percent increase in profits to $6.5 billion (R64.1bn) compared with the year- ago period, a result fuelled by a big jump in investment banking and improved credit quality.

But the bank, the largest in the US by revenue, also prospered from the absence of a $4.4bn charge in the year-ago period tied to its losses in the so-called “London whale” trading debacle.

In future quarters, JPMorgan and its peers will not benefit from cheery comparisons with a one-off event like the whale, said S& P Capital IQ analyst Erik Oja.

Oja also sees little further opportunity for cost-cutting.

“I don’t think it’s going to be sustainable,” Oja said of JPMorgan’s robust secondquarter performance.

JPMorgan was also among the most cautious about mortgage banking, warning of a big potential drop in mortgage refinancings if interest rates continued to rise.

Mortgage banking was also a weak point for Bank of America, which saw losses in consumer real estate deepen to $937 million from $744m.

But Bank of America’s profit rise cheered the market, in part because of deep cost cuts and the absence of large charges that have plagued recent quarters.

Bank of America, which suffered badly during the financial crisis, outperformed on commercial loans, which surged 20 percent to $380.5bn.

Citigroup, another bare-survivor of the crisis, scored from big gains in equity and fixedincome trading, and solid revenues in emerging markets.

But Citi saw consumer loans tumble 7 percent to $382.2bn. Chief financial officer John Gerspach said US con- sumers were still in a period of “deleveraging” that might last at least a few more quarters.

Investment banks Goldman Sachs and Morgan Stanley benefited from big gains in equity and debt underwriting.

Trading of equities and other investments was also strong, but Goldman cautioned that results in its fixed-income and some other divisions faded towards the end of the quarter as interest rates rose.

While higher interest rates pose challenges, analysts note there is also an upside, particularly in a strengthening economy. – Sapa-AFP