With the quarterly earnings season already passed away, Financial Services companies have demonstrated to be the real winners in these turbulent times. The majority of the big banks, with some “excellent” exceptions, have outpaced analysts’ estimates. Cost-cutting and business optimization have been the main drivers for the rump-up in profitability.
Starting from Goldman Sachs, this bank is the main exception in the positive momentum banks earnings are experiencing. While major business lines have reported a solid growth pace, expenses have increased dramatically. Goldman Sachs earnings were deeply affected by litigation costs that the Company accounted in legal provisions, which amounted up to $2.77 per share, or $1.48bn. The Bank is in talks with authorities to settle the misconduct in the mortgage crisis. All the major business lines have shown solid growth. Investment Banking grew 13.4% YoY, with the Bank ranking in the top positions in all major Financial Advisors League Table, having topped, as of today, the $1 trillion threshold in Global announced M&A, according to Dealogic. Investment Management revenues increase reflect the effort of Management to focus in this business Area. The firm announced two acquisitions in asset management businesses since the start of the quarter, Imprint Capital, an impact investing firm, and Pacific Global Advisor Solutions from Pacific Life Insurance Company, a New-York based firm specialized in customized investment and risk Management solutions. Trading revenues have been mixed, with serious plunges in FICC, but good performances in Equity +24%. Overall, without legal charges accounted as provisions, the Bank outperformed market expectations.
Morgan Stanley has been keeping a solid track record of economic performances. CEO James Gorman has been reshaping the Bank’s business focus and revitalized the Bank profitability. The Bank outpaced market consensus in Revenues reporting $9.8bn in Revenues vs. $9.1bn, and EPS excluding items at $0.79 vs. expectations at $0.74. Even if Investment Banking revenues fell almost 1%, Morgan Stanley, according to Thompson Reuters, ranked 2n globally in 1H 2015 in advising deals. MS Management is keeping on shifting from volatile businesses such as Bond Trading towards more stable and predictable ones such as Asset Management, which, as of today, accounts for 27% of its revenues. Trading Revenues shone, with great results in Equity, jumping 27% to $2.27bn. EPS on a YoY basis dropped almost 8% due to increased compensation costs. The Firm had a $609m tax benefit the year before.
Going forward to the biggest US banks by assets, J.P. Morgan beat profit analysts estimates, mainly due to reductions in litigation expenses, while other business lines remained flat. “Investment banking revenue was up 4% on higher advisory fees and higher debt underwriting fees, partially offset by lower equity underwriting fees compared to a strong quarter for equity underwriting in the prior year” (J.P. Morgan earnings release). J.P. Morgan continues to benefit from the prosperous M&A environment, being among the top three in the Financial Advisors League Tables. Corporate and Investment Banking unit instead reported a decline in Net Revenues of 6% from previous year, dragged by lower Lending revenues.Trading revenues are still mixed, while Equity trading soaring 27% and Fixed Income falling 21%. The Asset Management unit Net Revenues increased 6% up to $3.175bn, while “Assets under management were $1.8 trillion, an increase of 4% from the prior year, due to net inflows to long-term products and liquidity products.”
Bank of America Merrill Lynch surprised analysts reporting $0.45 EPS, vs. $0.36 consensus. “Solid core loan growth, higher mortgage originations and the lowest expenses since 2008 contributed to our strongest earnings in several years, as we continued to build broader and deeper relationships with our customers and clients. We also benefited from the improvement in the U.S. economy, where we are particularly well positioned,” CEO Brian Moynihan said. Bank of America has been one of the most affected banks in the mortgage crisis in terms of litigation expenses. Investment Banking fees amounted to $1.5bn, reporting slight decrease from the previous year, but still ranking 3rd globally, as of June 30, according to Dealogic. Trading Revenues were mixed as BofA’s peers, with uptrend in Equity S&T and downturn in FICC. Global Markets unit, on a YoY basis is down 7% from the previous year to $4.259bn. Asset Management fees increased 9% to $2.1bn, and Total Client Balances, which include Asset under Management, Asset under Custody, Client Brokerage Assets, and client deposits and loans totaled more than $2.5 trillion. The Bank efforts in expanding this particular area of business is reflected in the increased number of advisors, by 1077 workers. Litigation and operating expenses other than compensation and benefits dramatically decreased reflecting stronger effort in cost cutting and expense management.
Citigroup has been another bank who outperformed market consensus. Bank’s profits were hammered down last year by litigation expenses. The mortgage settlement with the US Department of Justice costs the bank more than $4bn. Quarterly profit saw a robust rebound. Institutional Client Group, the Corporate and Investment Banking arm of Citigroup, reported a 6% Increase in Revenues up to $8.9bn. “Investment Banking revenues of $1.3 billion decreased 4% versus the prior year period, as a 34% increase in advisory revenues to $258 million partially offset a 3% decrease in debt underwriting revenues to $729 million and a 25% decrease in equity underwriting revenues to $296 million”, Citigroup Press Release. Trading Revenue decreased mainly due to non recurring charge on the Equity segment for valuation adjustment. Fixed Income and Equity markets revenues totaled $3.7bn.
Some trends are identifiable. The majority of these Financial Institutions reported results that topped estimates due to improved conditions in the economic environment. Regarding the Investment Banking business the flat rate environment triggered an upticking volume in M&A, fueled by debt and equity financed transactions. Advisory business is experiencing a sprouting momentum. Most of the peers are investing in the Asset Management business, due to the safety and the predictability this business incorporates, and improved conditions in market confidence. Sales and Trading is experiencing weakness in the FICC, but strength in Equity. Overall, the sector was one of the most outperforming in this earning season. What the market will bring next?
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