Good News For Banks Seen Coming From Corporate Bond Boost
March 11 2009 - 1:40PM
Dow Jones News
There might finally be good news for some of America's biggest
banks.
Top executives have been quietly - and, sometimes boldly -
signaling that some of their businesses have gotten off to a good
start in 2009. A resurgence of corporate bond deals and trading
might be the reason behind it.
Corporate debt issuance has staged a recovery in recent months.
And banks are charging higher fees for trading and underwriting
after the credit crisis forced many competitors out of
business.
These are encouraging, if modest, developments for financial
firms still haunted by talk of nationalization and fears of more
write-downs.
Citigroup Inc. (C) Chairman and Chief Executive Vikram Pandit
gave one of the broadest assessments of improvement in bank
performance. "I am most encouraged with the strength of our
business so far in 2009," Pandit said in a memo to employees on
Monday. "In fact, we are profitable through the first two months of
2009 and are having our best quarter-to-date performance since the
third quarter of 2007."
His comments followed similar statements made by other top CEOs.
Bank of America Corp.'s (BAC) Kenneth Lewis told employees in a
memo last month that January results were "encouraging" as
fixed-income markets recovered. JPMorgan Chase & Co.'s (JPM)
Jamie Dimon touted the firm's trading results at a Feb. 23 meeting
with investors.
Pandit's remarks this week spurred steep gains for financial
company stocks. Sandler O'Neill & Partners analyst Jeffery
Harte said, "While we expected the firm to be profitable excluding
provisions and markdowns on troubled assets, we did not anticipate
a bottom-line profit. For the first time in a long time our outlook
may have an upward bias."
Though the CEOs stopped short of identifying specific areas
driving profits, analysts believe most of it is coming from the
debt markets. Thawing in some credit markets at the start of the
year has led to a flurry of corporate bonds underwritten by major
banks.
For instance, Boeing Co. on Tuesday launched a $1.85 billion
debt sale that will be completed in three stages. Proceeds will be
used for general corporate purposes, and book managers include
JPMorgan and Banc of America Securities.
That adds to $1.2 trillion worth of global debt volume so far
this year, compared to $974.9 billion in the same period in 2008,
according to financial data provider Dealogic. Those issues
generated $3.2 billion in underwriting fees this year, with the top
ten banks splitting $1.7 billion of that amount.
Banks charge fees to help companies raise and sell debt. So far
this year, those fees are 7% higher than the same period last year,
though significantly lower than the start of 2007, according to
Dealogic.
Analysts warn that corporate debt issuance will wane as the year
goes on.
"You've had a relatively big rally from the middle of December
through the middle of February, and that's generated a lot of the
new issues," said Joe Balestrino, a portfolio manager at Federated
Investors. "They want to load the gun so they don't have to come
back later."
Some of the biggest players on Wall Street have either scaled
back their business, or in the case of Lehman Brothers, simply
folded. Less competition allows surviving banks to charge higher
fees for everything from currency trading to bond issuance.
Several analysts who have had recent meetings with Goldman Sachs
Group Inc. (GS) Chief Financial Officer David Viniar confirmed that
the new pricing power will help profits.
That by no means indicates the banking heavyweights have
surmounted all their problems and will wrap up 2009 profitable. If
the economy continues to ratchet lower, the value of loans and
securities could lose significant value.
"There's still a lot to worry about," said Stuart Plesser, a
bank equities analyst with Standard & Poor's.
-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047;
joe.belbruno@dowjones.com