US banks' third-quarter profit seen mixed

PUBLISHED : Wednesday, 09 October, 2013, 12:00am
UPDATED : Wednesday, 09 October, 2013, 4:47am

Morgan Stanley, Bank of America and Wells Fargo are poised to report a jump in earnings that may surprise some investors fixated on a slump in trading and mortgage lending.

The three banks will probably post combined third-quarter profit of US$8.64 billion, or 14 per cent more than a year earlier, according to analysts' estimates. JP Morgan Chase, Citigroup and Goldman Sachs, meanwhile, are expected to report a 7.8 per cent drop in earnings. Five of the six firms may have squeezed more profit from each dollar of revenue as they benefited from cost cutting and a stronger US economy.

"I see companies that are improving their profitability," said David Hilder, an analyst at Drexel Hamilton in New York, adding that investors may be caught off guard if "too focused on lower fixed-income trading revenue or mortgage refinancing revenue".

JP Morgan has said its results will suffer from a bond-trading slump, while Wells Fargo told analysts to expect new mortgages to fall by almost 30 per cent.

The forecasts reflect clients pulling back amid speculation the US Federal Reserve will slow its US$85 billion in monthly bond buying. That led analysts to cut estimates for earnings at the six banks by 6.7 per cent last month.

Morgan Stanley probably generated more revenue than Goldman Sachs for the first time in two years, according to the estimates. Goldman Sachs gets the largest share of its income from trading of any of the six banks. Morgan Stanley chief executive James Gorman has been reshaping his firm to rely more on its brokerage for earnings as US stock markets reach record highs.

JP Morgan, the biggest US bank by assets, and Wells Fargo, America's top mortgage lender, report their earnings on Friday, with Bank of America, Citigroup, Morgan Stanley and Goldman Sachs following next week.

Banks have countered revenue declines by dismissing workers, consolidating offices and wringing costs out of operations, efforts that are starting to pay off.