JPMorgan Earnings Offer Hope for Morgan Stanley, Goldman

Thursday, 14 Oct 2010 02:15 PM

 

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Maybe Wall Street's much-hyped trading meltdown wasn't so bad after all.

That, at least, is what some investors are hoping after JPMorgan Chase & Co. earnings beat forecasts, due in part to investment banking revenues whose decline, while noticeable, was less steep than feared.

JPMorgan reported third-quarter results on Wednesday after a weeks-long negative drumbeat from analysts who cited weak volumes across markets as they slashed their estimates for Goldman Sachs Group Inc. and Morgan Stanley.

But analysts were a bit less downbeat about the two investment banks — re-christened during the financial crisis as bank holding companies — after seeing JPMorgan's fixed income and equities trading revenues fall just 7 percent from the second quarter, to $4.2 billion.

"Maybe that doom and gloom that you were getting from the traders might have just been a relative doom and gloom," said Brad Hintz, an analyst with Sanford C Bernstein.

JPMorgan reported equity trading revenues of $1.1, up 9 percent from the second quarter and up 21 percent from a year earlier. Fixed income trading revenues were not as encouraging, but also not as bad as some expected: $3.1 billion, off by more than a third from a year ago and down 12 percent from the second quarter.

The gloomy sentiments on some trading desks may reflect concern about shrinking bonus pools, because compensation is tied to net revenues, which were expected to tumble, analysts said. Through the first nine months of the year, JPMorgan's investment bank has set aside $7.9 billion for compensation expenses, down nearly $1 billion from a year earlier.

SLASHING ESTIMATES

Despite the glimmer of hope in the JPMorgan trading numbers, shares of Goldman and Morgan Stanley were little changed on Wednesday and were down 0.8 percent and 1.7 percent, respectively, on Thursday. Goldman is set to report quarterly results next Tuesday, and Morgan Stanley on Wednesday.

Analysts heeded warnings from traders and slashed estimates for Goldman and Morgan Stanley in recent weeks amid concerns about low trading volumes in equities, fixed income and derivatives.

Goldman is expected to report third-quarter earnings of $2.42, down from $5.25 a year ago, while Morgan Stanley is expected to earn 19 cents, down from 38 cents a year ago, according to Thomson One I/B/E/S.

Jeff Harte, an analyst with Sandler O'Neill, was feeling more optimistic about the prospects for both banks after seeing JPMorgan's numbers.

"These results are positive for JPMorgan and its peers," Harte wrote in a research note.

Others, like Anton Schutz, president of Mendon Capital Advisors, are not as sure that rivals will match the JPMorgan numbers, saying the better-than-expected trading results could be connected to JPMorgan growing its market share.

"It's hard to read through," he said.

Even JPMorgan Chief Executive Jamie Dimon, on a call with reporters on Wednesday, would not take a stab at what prompted his firm's trading numbers — and what they mean for competitors.

"Trading was about flat to last quarter," Dimon said. "There were ups and downs and ins and outs ... I don't really know what everyone is going to do on their trading results."

Hintz, for his part, does not expect any tears next week.

"When you look at JPMorgan, the message was that it was a slow quarter," he said. "But I don't think anyone is going to cry about the quarter. It wasn't as onerous as expected."

© 2014 Thomson/Reuters. All rights reserved.

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