Strong bank results mask wider weakness

John W. Schoen Senior producer • Profile • E-mail

The long national banking nightmare may be over — but only for a select few banks.

On Thursday, JPMorgan Chase & Co., bolstered by strength in investment banking, reported a 36 percent increase in second quarter profit that beat analysts' expectations.

The report follows news from Goldman Sachs on Tuesday of a stunning $2.7 billion profit less than a year after one of the worst financial crises since the Great Depression began. Revenues soared 39 percent to $25.62 billion.

But most of the industry remains mired in a pile of bad debts and rising defaults that continue to weigh on profits and balance sheets. CIT, struggling for survival under the pressure of continuing loan losses, was denied a federal lifeline Wednesday and now faces the prospect of bankruptcy or possible liquidation.

"The financial crisis is not over,” Stephen Roach, chairman at Morgan Stanley Asia said on CNBC. “The (International Monetary Fund) is telling us that by the end of this crisis $4 trillion worth of bad assets will be written down. Thus far financial institutions have written off, at most, half of that. So there plenty more to come.”

The surprisingly strong results at Goldman Sachs Tuesday sparked a wave of optimism that the heavy losses that have battered the banking industry for over a year may finally be easing. But a closer look at where Goldman made those profits may temper that enthusiasm. Profits were driven by record investment banking fees, including the underwriting of new stock sales for companies trying to raise cash.

With traditional investment banking competitors like Lehman Bros. and Bear Stearns no longer around to compete for investment banking business, Goldman Sachs was able to substantially increase its share of that business.

“Goldman is essentially the last investment house standing,” said Matt McCormick, a banking analyst at Bahl and Gaynor Investment Counsel. “So they have the ability not only to attract and retain great employees, but they have the ability to attract and retain great clients."

JPMorgan also saw big gains in its investment banking business and in revenues from bond trading, profit centers that only a handful of other large banks enjoy.

On Friday, Bank of America reported better-than-expected second-quarter earnings of $2.42 billion, but also said it was plagued by losses from failed loans. Citigroup posted a profit of $3 billion, instead of the loss Wall Street expected, but its earnings were helped by a gain of $6.7 billion from selling its stake in Smith Barney. Rising costs for bad loans also nagged Citigroup.

“When I look at the rest of the banks, I don't like what I see," said Jim LaCamp, a portfolio manager with Macroportfolio Advisors. "We still have deteriorating credit quality on real estate loans, commercial real estate loans on credit cards and so the regional banks are all still reeling."

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