Why banking institutions made more money in the first quarter
Wall Street and Main Street gave banks a boost last quarter.
Fees from corporate mergers and commissions from trading fueled profits at big financial firms. But average Americans also helped by taking out more home loans and paying off their debts.
Here’s a look at what drove the first- quarter results:
Ultra- low interest rates led to a surge of refinancing and new home loans in the first quarter. JPMorgan Chase created US$24.7 billion worth of mortgages, up 45 percent from a year earlier, while Bank of America put together mortgages worth US$13.7 billion, up 54 percent. Wells Fargo, the nation’s largest mortgage lender, generated US$49 billion in home loans, up 36 percent from the same period last year.
The jump in mortgages is notable because winter is typically the slowest time for the housing market. But bond yields, used to price consumer loans, have remained low. The yield on the 10-year Treasury note has fallen from 2.19 percent at the start of January to 1.9 percent this week.
Low interest rates are great for consumers, but they’re not so good for banks because they limit how much money they can charge people for loans. Bank of America’s net interest income fell 6 percent to US$ 9.5 billion while JPMorgan’s fell slightly to US$ 12.56 billion. While Wells Fargo reported a modest increase in net interest income, the margin Wells was earning on loans fell.
People are staying on top
of their debt payments. Loans that were 30 days late or more — an early indicator of problems with a loan — continued to fall at all major banks. Charge-offs, loans that banks have written off because they have gone bad, also fell.
Major banks, particularly those focused on consumers, have been cutting staff, selling assets and closing branches to help boost profitability. Citigroup’s expenses fell 10 percent in the quarter from a year earlier.
The bank cut its employees to 239,000 by the end of the quarter, down from 248,000 staff a year earlier. At the peak of the housing bubble in 2007, Citi had roughly 375,000 workers. JPMorgan and BofA have also been cutting staff.
A pickup in corporate mergers and acquisitions helped several banks report strong results at their investment banking divisions. The value of global mergers and acquisitions reached US$ 888 billion in the first quarter, the highest level for the period in at least five years, according to data provider Dealogic.
That translated into big fees for major investment banks, which get a percentage of every deal they advise on. Goldman Sachs’ investment bank generated net revenues of US$1.91 billion in the quarter, its highest quarterly performance since 2007. JPMorgan earned investment banking fees of US$ 1.8 billion, up 22 percent year over year.
Financial markets, particularly currency and oil, were particularly volatile. Those swings may make average investors nervous, but the heightened volatility can be good for bottom lines. As trading volume rises, banks earn more in trading commissions because investors change their positions more often. Traders take advantage of swings in markets to make a profit.
In currency markets, the U.S. dollar surged against the euro and yen, and the Swiss franc had its biggest one-day move in decades in January. The dollar has gained because investors expect the Federal Reserve to raise interest rates later this year, while Europe’s central bank is expected to keep pushing interest rates down.
Net revenues at Goldman’s fixed income, currency and commodities business rose 10 percent from a year earlier to US$3.13 billion. Goldman also had a great quarter in the stock market, with net revenues from stock trading up 46 percent from a year earlier.