The beginning of earnings season has brought with it the results from the largest banks in the country. Morgan Stanley (NYSE:MS), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) all showed strong growth in the quarter.
Morgan Stanley (NYSE:MS)
Morgan Stanley (NYSE:MS)’s second-quarter earnings and revenue jumped, fueled by gains in investment banking and wealth management.
Morgan Stanley reported net income of $980 million for the quarter, compared with $591 million in the same quarter a year ago. Per-share earnings of 41 cents were better than the 29 cents posted in the year-ago quarter, when a downgrade to the firm's credit rating led to a slump in trading revenue.
Morgan Stanley (NYSE:MS) said it would buy back up to $500 million of its own shares, news that surprised investors.
Goldman Sachs Group, Inc. (NYSE:GS)
Goldman Sachs said its second-quarter profit doubled, as the giant investment bank saw revenue climb 30% while stock and bond underwriting sales rose by nearly half.
Goldman said it earned $1.93 billion for the three months ending June 30, or $3.70 a share. The results handily topped analysts' average estimate of $2.87 a share in net income, according to FactSet. The firm earned $927 million, or $1.78 a share, in the second quarter of 2012. Revenue climbed to $8.6 billion
Despite the gains, Goldman shares dropped 1.7% on Tuesday, down $2.76 to $160.24.
One reason may be that almost two-thirds of the revenue gain came from its historically volatile business of holding equity stakes in companies and bonds for the firm's own account.
JPMorgan Chase & Co. (NYSE:JPM)
JPMorgan Chase & Co. (NYSE:JPM), led by CEO Jamie Dimon, posted a 32% increase in net income in the second quarter. The bank earned $6.5 billion, up from $5 billion during the same period last year. On a per-share basis earnings were $1.60, soundly beating the consensus estimate of just $1.44.
While consumer deposits and credit card sales volume were up 10% year-over-year loan growth grew more slowly. Business banking loan volume was up just 4% while net income from mortgage banking was down 14% as higher interest rates cut the number of loan applications.
Wells Fargo & Company (NYSE:WFC)
Wells Fargo & Company (NYSE:WFC) posted strong results as well. Second quarter profit rose by 19% to $5.52 billion, up from $4.62 billion one year ago. EPS of $0.98 beat the consensus analyst estimate of $0.93 handily.
Much like JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC) suffered from a weakened mortgage business, bad news given that Wells Fargo is the largest mortgage lender in the nation. Mortgage banking income declined by 3% year-over-year while the number of mortgage applications sank by 30%.
Citigroup Inc. (NYSE:C)
Citigroup Inc. (NYSE:C), the first of the bunch to report, reported that its second quarter profit surged by 42% year-over year. The bank earned $4.18 billion, or $1.34 per share. Adjusting for a one-time gain this was reduced to $1.25 per share, beating the consensus estimate of $1.17 per share by about 7%.
Citigroup Inc. (NYSE:C) has far less exposure to the mortgage market than other big banks, instead focusing heavily on international markets. Europe, the Middle East, and Africa saw huge jumps in earnings, while Asia and Latin America saw more modest growth. A slowing down of these fast-growing markets is the biggest risk for Citi.
Bank of America Corp (NYSE:BAC)
Bank of America Corp (NYSE:BAC) destroyed analyst estimates, with earnings rising 63% to $4 billion. EPS of $0.32 beat the consensus estimate by a staggering 28%, while revenue grew by about 3%. Shares of Bank of America reached new 52-week highs on the news.
Strong performance in equity sales and trading, along with lower expenses, drove Bank of America Corp (NYSE:BAC)'s earnings beat.
Much like JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC) the mortgage business struggled. Since much of the jump in profit was due to Wall Street related businesses it's unclear if this profit level is sustainable, especially with a weakening mortgage business.
Certain factors could spell the end of skyrocketing profits for big banks
Analysts predict that certain factors looming in the distance could spell the end of skyrocketing profits for big banks, as noted in The Week.
Along with the implementation of the U.S. regulatory overhaul known as the Dodd-Frank Act, Wall Street will face new restrictions under Basel III, a global regulatory standard that is scheduled to be introduced between 2013 and 2015. Basel III requires banks to hold more funds in reserve to better absorb losses in the event of a crisis.
Trouble in the bond market could also cut into banks' profits. The Federal Reserve remains coy about when it will start phasing out its bond-buying stimulus program, and the prevailing uncertainty has caused interest rates to edge up. Credit is the lifeblood of the financial industry, and mega-banks have relied heavily on the super-low interest rates of recent years to reap profits on an array of transactions.
"With the rise in interest rates, the tailwind for banks from the refinancing boom may soon fade," Bank of America Merrill Lynch analysts told CNBC.
3. Emerging markets
Growth in China, which has been the primary engine of the global economy for years, continues to slow, which has made it riskier to invest in emerging markets as a whole.
China's neighbors in Asia are highly dependent on the region's powerhouse for growth. Furthermore, emerging economies as far-flung as Latin America could also suffer, given that they sell the bulk of their resources to China.
All of which spells trouble for multinational banks that have spread their tentacles to emerging markets while the economies of the U.S. and Europe continue to struggle.
Citigroup Inc. (NYSE:C), which earned more than 40% of its revenue for the first half of the year from developing nations, is particularly susceptible as outlooks for those economies weaken.
"If anything goes bump in the world, Citigroup may well have some exposure," Fred Cannon, an analyst at Keefe, Bruyette & Woods, told Reuters.