Despite concerns over the solvency of the United States of America, its banks are still doing quite well. Both JP Morgan Chase and Goldman Sachs beat earnings expectations Jan. 16, with Goldman outperforming.
Goldman crushed earnings per share (EPS) expectations by delivering $5.60 versus consensus expectations of $3.78, up 96 percent from the previous quarter and a staggering 205 percent from the fourth quarter of 2011.
Digging into the numbers, they show that the beat and growth came mainly from strong proprietary (prop) trading operations, which is when a firm trades stocks, commodities, and so on with its own money. Goldman names its prop desk “Investing and Lending” division, which contributed $1.97 billion to total revenues of $9.24 (up 53 percent from Q4 2011).
Within the division, strong gains in private equity investments were responsible for the contribution. Investment banking revenues also increased 64 percent over the fourth quarter of 2011, mainly driven by a strong rebound in debt underwriting (up 203 percent from Q4 2011).
The earnings per share beat, however, was also driven by strong cost control and a reduction in outstanding shares which decreased five percent over compared to the last quarter of 2011. The firm let go of 200 employees and only earmarked $1.98 billion in compensation for its employees, or 21.4 percent of revenues. This figure is far lower than the 40 percent average.
Due to the solid performance over the whole year (revenues increased 19 percent to $34 billion), employees don’t need to fret. Their average bonus for 2012 will still be just a tad below $400,000. Goldman’s stock rose 4 percent in NYSE trading Jan. 16.
JP Morgan Beats but Some Details Lacking
JP Morgan Chase & Co. reported Q4 EPS of $1.39 versus consensus expectations of $1.20. Deutsche Bank says that the beat came from lower compensation as well as better investment banking activity.
The company also announced record earnings for 2012, netting $21.3 billion, up 12 percent from 2011 on revenues of $99.9 billion. Like Goldman Sachs, JP Morgan benefitted from strong investment banking performance. Fees for mergers & acquisitions (M&A), debt and equity underwriting increased 54 percent over Q4 2011 to $1.7 billion.
Despite the EPS beat, total revenue actually declined $1.5 billion from Q3 2012 to $24.4 billion, as did net income (down $16 million to $5.69 billion).
Also, JP Morgan has to grapple with some issues that Goldman Sachs doesn’t have. First, it juiced results by reducing the funds it has earmarked for bad loans, releasing $900 million from the so-called “loan loss reserves,” which directly benefits pretax income. The problem with these extraordinary items is that they don’t come from recurring and sustainable operations.
In addition, JP Morgan had to take a hit of $900 million in penalties it has to pay according to the settlement with the Federal Reserve and the Office of the Comptroller of the Currency with respect to mortgage fraud. These payments will likely decrease over coming quarters, but will remain until all victims have been compensated according to the settlement.
Lastly, the Chief Investment Office (CIO) reported a net loss of $157 million in the wake of the failed speculation involving up to $100 billion in derivative bets on corporate credit. JP Morgan estimated the total loss to be $6.2 billion, but the total will not be seen until the position is completely unwound.
Mainly because of this scandal, JP Morgan CEO Jamie Dimon’s bonus was cut by 50 percent to $10 million, in addition to his base salary of $1.5 million. JP Morgan’s stock advanced 1 percent Jan. 16.
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