Trading and one-off gains lift bank profits

Goldman Sachs and JP Morgan made record net revenue in the quarterly filings, while Bank of America (BoA) and Citigroup also managed to turn a profit.

"The encouraging thing is that investment banking revenues were particularly strong, [but] trading gains are impossible to predict. The offset, as we've been saying for a long time, is that the credit cycle is only picking up speed right now," said Tanya Azarchs, New York-based credit analyst at rating agency Standard & Poor's.

In its second-quarter filing on July 14, Goldman Sachs reported record net revenue of $13.76 billion. The bank reported net income of $3.44 billion, an increase of 65% over the corresponding period in 2008.

Net revenues in trading and principal investments were 93% higher than the second quarter of last year at $10.78 billion. This was partly thanks to record net revenue of $6.8 billion in fixed income, currencies and commodities - up from $2.38 billion in the second quarter in 2008.

On July 16, JP Morgan reported record net revenue of $27.7 billion. It earned $2.7 billion in net income, an increase of 36% over the same period last year. This was fuelled by record revenue in investment banking, including record fees and fixed-income markets revenue, the bank said. Investment banking fees rose 29% from the second quarter of 2008 to reach $2.2 billion, while fixed-income markets revenue went up 88% to reach $4.9 billion.

Both BoA and Citigroup reported their second-quarter results on July 17, producing net income of $3.2 billion and $4.3 billion, respectively. However, both of these figures included hefty one-off gains. In the case of BoA, the firm booked $5.3 billion in pre-tax gains from the sale of its stake in China Construction Bank. Meanwhile, a deal to merge Citigroup's wealth management arm with that of Morgan Stanley, which was announced in January, produced a sizeable $11.1 billion pre-tax gain.

Mark-to-market accounting requires banks to record losses on their own improving creditworthiness - something that led all four banks to lose out in the second quarter, noted Azarchs. JP Morgan, for example, said its strong revenues in fixed income were partially offset by a $773 million loss from the tightening of the firm's credit spread. Banks had previously been criticised for booking gains on the back of widened spreads at the height of market turmoil.

The results of both Goldman Sachs and JP Morgan included the effect of buying back the $10 billion and $25 billion in preferred shares they received through the US Treasury's Troubled Assets Relief Programme (Tarp), along with accrued dividends.

Attention may now switch to the warrants held by the Treasury linked to the two banks, as well as the other eight firms that have repaid Tarp funds. In order to buy them back, the firms must attempt to come to agreement with the Treasury on a price, or submit to third-party appraisals.

See also: Tarp warrant sales could drive down vol on financials
S&P downgrades 18 US banks to reflect 'new reality'
Banks repay $68bn in Tarp funds to US Treasury
Stress-test success masks bigger problem with banks

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