April 17, 2009 / 12:57 AM / 10 years ago

JPMorgan and Goldman trading profits unlikely to last

NEW YORK (Reuters) - JPMorgan Chase (JPM.N) and Goldman Sachs Group (GS.N) racked up billions of dollars in trading profits in a volatile first quarter — but don’t expect these lucrative markets to last into the next quarter, or to necessarily benefit other banks, analysts say.

Goldman and JPMorgan, seen as probable long-term survivors amid the carnage that ravaged most of the industry, boosted their trading risk levels in the first three months of the year to exploit swings in asset prices.

They both expanded market share following Lehman Brothers’ demise in September and Bank of America’s (BAC.N) capture of Merrill Lynch.

Citigroup (C.N), another major competitor in past years and under intense scrutiny following a government rescue, will see whether its hobbled financials significantly weakened its trading business when it reports quarterly results on Friday.

But trading profits and market-share gains may not be so easy to come by in the second quarter, analysts caution, and it may be too late for other banks like Morgan Stanley — which reports next Wednesday — to catch up.

“This is about the best it’s going to get,” said Paul Miller, analyst with FBR Capital Markets.

“A lot of good things happened in the first quarter,” added Miller, noting the pick up in debt and equity issuance after capital markets stagnated at the end of last year.

JPMorgan’s results benefited from debt underwriting in particular, where it finished second in global rankings for quarterly issuance, followed by Citigroup, Bank of America, Morgan Stanley and Goldman — in third, fifth, seventh and ninth places, respectively.

For global equity issuance, JPMorgan was again second, followed by Bank of America, with Morgan Stanley, Citigroup and Goldman Sachs in fourth, sixth and eighth places.

In addition, the first-quarter mortgage refinancing push led by the U.S. government helped JPMorgan and Wells Fargo (WFC.N), Miller said, and it may have helped other commercial banks including Citi and Bank of America.

But the rush from consumers refinancing mortgages, or from companies raising capital, may slow in the second quarter.

“We are not projecting this quarter’s out performance to be sustained for several more quarters,” said Michael Wong, analyst at Morningstar Inc.

Some indications are that volatility is abating — the Chicago Board Options Exchange’s VIX volatility index has fallen for its third straight day — and credit spreads may be easing. These shifts could mean less trading opportunities for JPMorgan and Goldman Sachs.

Even if markets fluctuate further, JPMorgan and Goldman Sachs’s first-quarter trading revenue of $6.96 billion and $7.15 billion (4.8 billion pounds), respectively, could still be under threat if competition heats up.

“Everyone knows this is the business line that outperformed this quarter,” said Wong, adding that as other firms jump onto the bandwagon, there will be more competition for trades and underwriting fees.

Boutique banks have been hiring and expanding into trading as larger banks have trimmed staff in a bid to cut costs. Aladdin Capital, a $15 billion Stamford, Connecticut-based money manager, said on Tuesday it is launching a debt capital markets group.

MORGAN STANLEY, BofA IN SPOTLIGHT

Investors’ focus for the next week will be on whether Morgan Stanley and Bank of America — which combined its investment banking unit with Merrill’s in January — have also managed to profit from volatile markets.

“It does put a good deal of pressure on Morgan Stanley and the Bank of America unit to have and be able to report strong results,” said George Ball, chairman of investment firm the Sanders Morris Harris Group in Houston. “If they do not they will be badly compromised,” Ball added.

One of the two last surviving investment banks, Morgan Stanley became a bank holding company along with Goldman Sachs last fall, but it has struggled more than Goldman under losses from complex debt securities and leveraged loans.

Bank of America is also battling mounting losses at Merrill Lynch as well as its own credit card and mortgage units.

While in general the trading profits from JPMorgan and Goldman indicate that other investment banking units may have prospered, the caveat is that other banks do not have the capital to support the same volume and scale of trading activity as Goldman and JPMorgan.

“JPMorgan and Goldman have some of the best balance sheets in the industry, we can see they benefited from that,” said Wong, adding, “Morgan Stanley is not as strong as JPMorgan and Goldman, so they may not have benefited to the extent that JPMorgan and Goldman Sachs did in this environment.”

Reporting by Elinor Comlay; Editing Bernard Orr

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