What firms need “is an environment in which global trading and investment-banking revenues grow reasonably in line” with global nominal gross domestic product, Chris Kotowski, an analyst at Oppenheimer & Co., wrote in an April 16 note. “Until this happens, the earnings leverage is achieved on the expense side, and this is finite.”
Brian T. Moynihan, the 53-year-old CEO of Charlotte, North Carolina-based Bank of America, has made lowering risk a priority. He cited that as one reason the firm’s trading revenue fell 13% in the quarter, including a 20% drop in fixed-income, currencies and commodities that was worse than at most rivals. It was the only firm to report net income that fell short of analysts’ estimates. Trading-revenue figures exclude accounting charges.
U.S. regional banks also have been cutting costs and setting aside less for sour loans to bolster profit. Net income at Minneapolis-based U.S. Bancorp, the nation’s largest regional lender, climbed 6.7% as the company decreased its provision for loan losses. Revenue fell 1.1% and missed analysts’ estimates.
To compensate for flagging revenue, the six biggest banks cut expenses by 6.1% to a combined $71.6 billion. JPMorgan led firms announcing job reductions in the first quarter, planning as many as 17,000 cuts through 2014. CEO Jamie Dimon, 57, shrunk its investment bank’s pay pool by 7% from a year earlier. Morgan Stanley, led by CEO James Gorman, 54, cut its institutional securities unit’s compensation pool by 14%.
“We are leery of large investment-banking businesses and trading operations because it seems to be under siege,” Mullaney said. “You see people being laid off left and right because the business is not there right now.”
Citigroup’s profit jump also was aided by a $700 million tax benefit and a decline in reserves for loan losses, which fell 16%. Altogether, JPMorgan, Bank of America, Citigroup and Wells Fargo set aside 25% less for loan losses in the first quarter than the same period last year.
“The ones that are succeeding right now are the ones that have the ability to move the needle on costs,” Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said of banks’ profits.