Banks use trading to boost earnings while loan losses start to show signs of improvement

Banks trade their way to profit; loan losses ease

NEW YORK — The nation’s big banks have found the key to success while they wait for the economy to recover: aggressive trading of investments including bonds, currencies and commodities.

But they may also be heading toward making money on loans again. The big banks that have released earnings over the past week all reported improvements in their consumer loan portfolios.

Banking executives had been conservative about their views on the economy and predicting a peak in losses from failed loans. Now they are saying mortgage and credit card defaults are declining.

A drop in loan defaults and the amount of money set aside for future loan losses is among the clearest signs that the economy is recovering, albeit slowly, from a recession. It means customers are better able to repay debt. It gives hope to financial institutions that have lost billions of dollars on soured loans.

Wells Fargo & Co. said Wednesday it has “turned the corner” with its credit problems. The bank reported earnings of $2.37 billion, or 45 cents per share. It set aside $5.3 billion to cover bad loans during the quarter, down 9.9 percent from $5.9 billion in the previous quarter.

Wells Fargo Chief Credit and Risk Officer Mike Loughlin said in a statement the bank believes “quarterly total credit losses have peaked.”

The San Francisco-based bank was ahead in front of its peers, declaring after the fourth quarter that the economy is healing. But a drop in losses from loans in the first quarter certainly helped Wells Fargo and other big banks beat analysts’ earnings forecasts.

Jamie Cox, managing partner at Harris Financial Group, said, “If you can get loan losses to decline, that will magnify earnings.”

Profits could jump as fast as they fell when the recession and credit crisis hit in loan-loss reserves shrink, Cox said.

Even JPMorgan Chase & Co. CEO Jamie Dimon was more optimistic than he had been in the past. He told investors that JPMorgan “continued to see delinquencies stabilize, and in some cases improve.”

JPMorgan Chase earned $3.3 billion, or 74 cents per share. Its non-performing loans, those that are in default or close to being in default, totaled $2.7 billion, down $763 million from the previous quarter.

Not all analysts are convinced, though, that loan losses are permanently on the downswing.

Banks have done a good job setting aside money to cover losses, “but I think it’s still too early to say we’re turning a corner,” said Paul Miller, head of financial institutions research at FBR Capital Markets.

Until that time though, many big banks have relied on other ways of earning money, particularly their trading operations. Banks like JPMorgan Chase, Citigroup Inc. and Bank of America Corp. were able capitalize on improved markets to go along with modest improvements in lending operations.

Goldman Sachs Group Inc. and Morgan Stanley, which don’t have the consumer retail businesses that other companies have, also generated much of their revenue and profit from trading.

Morgan Stanley said Wednesday it earned $1.41 billion, or 99 cents per share. The investment bank, which was criticized last year for being too conservative as markets recovered, saw its revenue from trading almost triple to $4.1 billion from a year earlier.

However, trading can be a fickle business. Banks have been profiting in recent quarters from continuing low interest rates that allow them to borrow money cheaply and put it into higher-yielding investments such as stocks and corporate bonds. If rates go up, it won’t be so easy for them to make so much money.

Still, the Federal Reserve has repeatedly said it plans to keep interest rates low to sustain economic growth.

FBR’s Miller said trading profits should remain strong while the Fed maintains its current strategy.

“It’s not sustainable in the long run, but for now will help them earn through the crisis,” Miller said.

In order to continue to beat expectations, banks’ optimism over dwindling loan losses must come true. They will need them to offset the eventual slowdown in trading profits.

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AP Business Writer Ieva M. Augstums in Charlotte, N.C. contributed to this report.