There’s a running theme to banks’ first-quarter results and that is the contribution from investment banking, and fixed income and currencies trading in particular.
Here for instance, was a recent slide from a Barclays presentation, suggesting hefty rises in currencies, commodities and fixed income trading in the first-quarter. Goldman Sachs reported record net revenues of $6.56bn in its fixed income, currency and commodities unit.
JP Morgan, which released Q1 results yesterday, was virtually the same. The bank reversed its 2008 Q1 investment banking net loss of $87m to $1.6bn net income in Q1 2009 — almost entirely driven by fixed income trading. Revenue from the unit also increased to a record, $4.9bn compared with $466m in 2008.
Here was the bank’s explanation for the rather dramatic rise.
The increase was driven by record results in credit trading, emerging markets and rates, combined with strong results in currencies and gains of $422 million from the widening of the firm’s credit spread on certain structured liabilities.
The Baseline Scenario’s James Kwak has some nice charts of that dramatic action in fixed income. Click to enlarge.
The question now will inevitably be whether the bank can continue that performance. Kwak is certainly sceptical.
So for JPMorgan to reproduce these results quarter after quarter, it would have to have unprecedented, exceptional, super-duper fixed income trading revenues quarter after quarter. Now, JPMorgan’s prospects may be better than they were before the bust, since two major investment banks are gone, one of them absorbed into JPMorgan itself, meaning less competition and higher fees all around. But we also know that last quarter was a bit unusual because of the massive unwind at AIG, which hopefully will not be repeated.
Likewise Citi, which reports its Q1 earnings Friday, will have to repeat a stellar performance in investment banking to make up for what are expected to be large loan losses. Opinions are divided on whether it can do so. From the Wall Street Journal:
For some analysts, [head of corporate and investment banking John] Havens’ changes come too late. Already, Morgan Stanley, Goldman Sachs Group Inc. (GS), and JPMorgan Chase & Co. (JPM) are regrouping, perhaps gaining momentum faster than Citi. However, Citi might not have lost its historic strength in the fixed income and foreign exchange businesses. Those were the businesses that lifted Goldman Sachs’ first quarter results reported Monday.
Citi CEO Vikram Pandit has already said the bank was profitable in the first two months of the year but March, according to another investment bank head, was a bit more difficult.
Related links:
The IBs of March – FT Alphaville
The return of the IB capital call – FT Alphaville
On Wells Fargo and banks’ well-being – FT Alphaville
Citi’s early cheer put to the test – FT