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U.S. Banks 1Q13 results summary

by William Arnold | May 14, 2013

Overall North American bank revenues were weaker and net interest margins were also down. Capital markets revenues were in line with expectations, but still down year on year. Mortgage revenue declined but some banks guided to higher mortgage income in 2Q13. Expense improvements helped offset weak revenue trends, as banks shed assets and focus on cost cutting initiatives. Asset quality measures such are charge offs, non-performing assets and reserves continue to improve as credit and housing trends improve.

Generally, the ratings outlook for U.S. banks are negative, reflecting the negative outlook on the U.S. sovereign rating, as well as the potential negative impact that yet-to-be-finalised regulations (particularly the Volcker Rule) could have on these businesses.

Bank of America - Overall OK, but weaker than peers

NPAT increased from $328m 1Q12 to $2.25bn 1Q13. Revenues declined 12% in mortgage production income and 20% in fixed-income, currency, and commodity trading (excluding debt valuation adjustments), as well as lower net interest income. However, wealth management revenue grew 7% from client asset inflows and market appreciation, and investment banking revenues increased 26%. The net interest margin was down 8bps to 2.43% because the reduction in funding costs was not enough to offset falling loan and investment yields. Results also reflected lower legacy assets and servicing expenses coupled with lower core expenses (down 6%) and reserve releases of $0.8bn.

Asset quality improved from the previous quarter, with net charge-offs and nonperforming assets down to 1.14% and 2.44% of loans, respectively, reflecting improvements in consumer real estate. There is still uncertainty and volatility regarding the company's legacy mortgage exposure.

BoA's estimated Basel III Tier 1 common equity ratio improved 17bps to 9.42% and should continue to improve given lower costs and continued declines in risk-weighted assets.

Citigroup Inc. – Strong revenues and improved credit profile

NPAT increased 30% YoY to $2.9bn and revenues were up 6% to $19.4bn despite a roughly $500m reduction in reserve releases. Revenue growth came from strong results in Latin America consumer banking and continued solid underwriting results. Excluding legal and restructuring costs, expenses were basically flat versus last year at $11.5bn – as the firm continues cost cutting initiatives.

Net credit losses declined roughly 3.5% to $3.0bn, reflecting improving credit trends.

Management's estimate of its Basel III Tier 1 common equity ratio was 9.3%, up from 8.7%. Given Citi's relatively modest capital return plans and ongoing decline in risky assets, we expect capital will continue to build. Citi Holdings' assets declined 4.5% from the previous quarter to $149bn or about 8% of consolidated assets. This ‘de-risking’ is expected to continue which if achieved, would help to reduce the company's risk exposure and further improve its credit profile.

Goldman Sachs – Buybacks and still builds capital

NPAT relatively stable YoY at $2.2bn 1Q13. Revenues reflected the typical seasonal improvement in market volume compared with the fourth quarter, but client activity was mixed, with generally lower market-making activity than the prior-year period but significantly higher underwriting activity. Rising equity market valuations and tight spreads in the bond market helped asset prices and new issuance volume. Goldman accrued compensation at 43% of net revenue, compared with 44% in the prior-year quarter, reflecting headcount reductions.

Average daily value-at-risk was flat from the sequential quarter at $76m.

Management estimated the firm's Basel III Tier 1 common equity ratio was about 9% for the period. While the bank continues its buyback programme the profitability of Goldman means it is likely to continue to build capital.

JPMorgan - Better expenses and credit

NPAT decreased from $2.9bn to $2.6bn 1Q13. Net revenue decreased 6% to $11.6bn. Net interest income was $7.2bn down 2% driven by lower deposit margins and lower loan balances due to portfolio runoff, largely offset by higher deposit balances. Non-interest revenue decreased 11% to $4.4bn driven by lower mortgage fees and related income.

The provision for credit losses was $549m, compared with $642m in the prior year and $1.1bn in the prior quarter. The current-quarter provision reflected a $1.2bn reduction in the allowance for loan losses and total net charge-offs of $1.7bn.

Estimated Basel III Tier 1 common equity ratio improved 20bps to 8.9%. However the Board intends to increase the 2Q13 dividend to $0.38 per share from the current $0.30 per share - returning the dividend to its highest level and also continue to buy back stock ($2.65bn 1Q13 and intends another $6bn through the remainder of the year). Such action is broadly negative for bondholders as it cuts the company's cash on hand and reduces the attractiveness of the balance sheet.

Morgan Stanley – Back to profit, accelerating asset reduction

NPAT was $936m compared a loss of $119m 1Q12. There was a 42% year-over-year decline in fixed income and commodities (FIC) trading and 19% drop in equity sales and trading (both exclude debt valuation adjustments). The decline in FIC sales and trading reflects weaker results in commodities and rates products, with some strength in securitised products and corporate bonds. There was 11% growth in investment-banking fees, 5% growth in wealth-management revenue and 21% improvement in asset-management revenue. The pretax margin for the wealth management business was 17% in the quarter versus 12% in 1Q12 because compensation grew slower than revenue, and non-compensation costs declined.

Management estimates its Basel III Tier 1 common equity ratio rose to 9.8% during the period from 9.5% at year-end. Morgan Stanley is ahead of its plan to reduce FIC risk-weighted assets and has been conservative in returning capital to shareholders, which has helped to build the ratio.

US Bank bonds

The credit quality of these US banks remains sound and may provide good diversification opportunities. The below table details AUD securities available.