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.

Cut­ting Costs

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.

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