Trading and technical gains outweigh loan losses in Q1

Strong trading results have offset large loan losses as banks report a mixed bag of first-quarter results.

Many banks benefited from accounting anomalies or gains in fixed-income and currencies divisions - fueled by pent-up demand that some fear might be a one-off in this quarter - which offset spiraling loan losses and toxic-asset writedowns, raising concerns over the health of banks' core business lines.

Credit Suisse announced that it saw a net income of Sfr2 billion ($1.72 billion) in the first quarter of 2009, relative to a net loss of Sfr2,148 million in the corresponding period last year, and a full-year 2008 loss of Sfr8.2 billion. Results were driven by the investment banking division, which saw a net income of Sfr2,414 million in the first quarter of 2009, compared with a loss of Sfr3,423 million in the first quarter of 2008 and a calendar year 2008 loss of Sfr14,183 million. Fixed-income trading was of particular benefit - specifically the trading of interest rate and foreign exchange products.

Despite the positive trading results, loan losses continue to burden the Swiss banking giant, as it wrote down Sfr1.4 billion in commercial mortgage-backed securities, a figure that rose from Sfr989 million in the fourth quarter of 2008.

On the other hand, UBS, which has not officially reported its first-quarter performance yet, had to brace investors for another round of bad news. "Unfortunately I am not able - as yet - to offer you any good news. Instead I am forced to present you with another round of unsatisfactory performance figures and to announce further drastic measures," warned UBS chief executive Oswald Grübel at the bank's annual general meeting in Zurich on April 15.

In the meeting, Grübel reported that UBS would make a Sfr2 billion loss in the first quarter of 2009, compared with a net loss of Sfr2,148 million in the corresponding period last year.

Grübel said the result was due to Sfr3.9 billion in losses on illiquid risk positions, credit loss expenses and writedowns on the assets transferred to the Swiss National Bank's Stabfund - a special-purpose vehicle created last October to absorb up to $39.1 billion of the firm's toxic US and European residential and commercial mortgage-backed securities, as well as other asset-backed securities on its balance sheet.

The bank's poor results for the first quarter follow a Sfr8.1 billion loss incurred in the final quarter of 2008, and a net loss of Sfr20.9 billion for the full year.

UBS plans to save up to Sfr4 billion by the end of 2010 by reducing costs, most of which will come from cutting 8,300 of its 76,200 employees by the end of 2010. The bank is set to report its results on May 5.

JP Morgan reported that it earned $2.14 billion in the first quarter of 2009, a decline from the corresponding period last year, when it saw a net income of $2.4 billion.

As elsewhere, the investment-banking division drove the results as the bank benefited from a record net income of $4.9 billion within its fixed-income markets division, up from $466 million in the first quarter of 2008. According to JP Morgan, the result was driven by record profits in credit trading, emerging markets and rates, and healthy returns in currencies.

Technical anomalies were also partly to credit for the strong result, as the bank saw a gain of $422 million from the widening of the bank's credit spread on select structured liabilities, which increased the accounting value of its own debt, producing a book profit.

In total, the investment-banking division generated record net revenue of $8.3 billion and a record profit of $1.6 billion. The bank also moved to increase its lending book, extending $150 million in new credit in the quarter.

Despite the positive showing, certain parts of the bank's business were still hurt by the deterioration in market conditions. JP Morgan marked down $711 million in leveraged loans and unfunded commitments, as well as $214 million on mortgage-related exposures; it also added $4.2 billion to credit reserves. The bank's non-performing assets rose to $14.7 billion at the end of the quarter, up from the prior year's level of $5.1 billion.

Also announcing a positive quarter was Citigroup, which was buoyed by strong trading results in its capital markets division; the bank saw $1.59 billion in net income in the first quarter of 2009, compared with a net loss of $8.29 billion in the fourth quarter of 2008, and a loss of $5.11 billion in the 2008 calendar year.

Results were primarily driven by the securities and banking area, which saw revenues of $7.2 billion. These were also aided by lower writedowns within the securities and banking area.

Despite the positive news, many of Citi's main business lines continued to suffer. The bank reported a bottom-line loss of $0.18 per share, after the payment of $2.6 billion associated with January's issue of preferred stock. Mounting loan defaults led the bank to see a 76% rise in credit costs which totalled $10.3 billion in the quarter; these consisted of $7.3 billion in net credit losses, $332 million in policyholder benefits and claims, and a $2.7 billion boost in loan loss reserves as the bank braced for anticipated losses.

Citi's securities and banking division also recorded a net $2.5 billion credit-value adjustment (CVA) on derivatives positions, excluding monolines. A CVA is an accounting item taken against derivatives mark-to-market values that reflects the credit risk inherent in each trade - thus Citi reaped a profit on the widening of its own spreads.

The bank has continued efforts to reduce costs - which included slashing 13,000 jobs in the first three months of the year.

Perversely, Morgan Stanley was hurt in the quarter by an improvement in its credit quality. The bank reported that it saw a net loss of $177 million in the first quarter of 2009, affected by a $1.5 billion accounting loss related to a tightening of its own debt-related credit spreads. It also saw a net loss of $1 billion on commercial real-estate investments.

In an effort to improve its capital base, Morgan Stanley slashed its quarterly dividend by 80% to $0.05 per share.

Reaping benefits from strengths in its fixed-income, currencies and commodity trading unit, Goldman Sachs reported a net income of $1.66 billion in the first quarter, which marked a 13% rise from the corresponding period in 2008, when it saw a net income of $1.47 billion.

Nevertheless, other units still struggled in the quarter, with the bank's principal investments unit recording a net loss of $1.41 billion, which included net losses of $640 million from real estate principal securities, $621 million in corporate principal investments and a $151 million loss tied to its investment in the Industrial and Commercial Bank of China.

See also: Technical factors drive banks back into black
Desperate Q4s call for desperate measures