Earnings for brokerage firms and investments banks had a 24% jump in the second quarter of 2014, a sizeable rise from its 17% earnings increase in the first quarter, according to data compiled by Reuters.
The group’s earnings has risen 25% over the past five years.
Sales for financial services firms moved ahead 28% in Q2, up from 22% last year. The sector’s average five-year sales growth rate is 13%.
Financial stocks, though, as measured by the Financial Select Sector SPDR (XLF), have gained 6.5% in the first 8 months of 2014, lagging the S&P 500’s roughly 8% gains but outperforming the Dow Jones’ 3% uptick; the iShares Financial ETF (IYF) is up 6% as of Sept. 1.
But many of the larger institutions continue to see litigation expenses rise and sales in fixed-income products and services decline.
(Check out last quarter’s winners and losers: 12 Best & Worst Broker-Dealers: Q1 Earnings)
Here are 12 companies, ranked in terms of how they out- or underperformed their broker-dealer rivals in the second quarter.
BANK OF AMERICA (BAC)
Bank of America saw its second-quarter profits tumble 43% due to $4 billion spent on litigation, including a $8.5 billion mortgage settlement with AIG
Revenue in the quarter declined 4% to $22 billion as expenses climbed 16% to $18.5 billion.
Revenue from trading fixed income, currencies and commodities rose 5.2% to $2.37 billion, while equities trading revenue slipped 14% to $1.03 billion from a year earlier.
CEO Brian Moynihan said during a May investor conference that Justice Department probes are the biggest legal issue it must resolve. The severity of the mortgage hangover, which caused a $276 million first-quarter loss, and the time it has consumed are the biggest disappointments of his tenure, Moynihan added.
On the upside, Bank of America-Merrill Lynch’s global wealth operations reported a pre-tax profit of 25% for the second quarter – its sixth consecutive period of 25%-plus results.
Its level of pre-tax income in the period was $1.15 billion on net revenues of $4.56 billion; Merrill’s sales represented $3.80 billion or about 83% of the broader group’s results, which includes the operations of U.S. Trust.
BofA-Merrill has a total of 15,560 reps, with about 13,845 working under the Merrill Lynch brand. Their average productivity is $1.06 million per rep per year; experienced reps produce $1.34 million, the company says.
Its level of client assets is $2 trillion for Merrill Lynch and $2.5 trillion for BofA-Merrill (including U.S. Trust).
Net asset flows in Q2 were $12 billion, a slowdown from the prior quarter.
JPMorgan posted second-quarter profit that beat estimates as fixed-income trading revenue fell less than analysts expected.
Net income, though, declined close to 8% to $5.99 billion, or $1.46 a share, from $6.5 billion, or $1.60, a year earlier. Earnings excluding some items were $1.59 a share, topping the $1.31 average estimate of 29 analysts surveyed by Bloomberg. Revenue slid 2.3 percent to $25.4 billion from a year earlier.
Quarterly results were overshadowed by questions about the health of Chief Executive Officer Jamie Dimon, who said he would undergo radiation and chemotherapy for throat cancer.
JPMorgan warned investors in May to expect Wall Street’s trading slump to continue through the second quarter, saying that fixed income and equities trading revenue could drop 20% from a year earlier.
Fixed-income clients are making fewer bets amid low volatility and the Federal Reserve’s move to slow bond purchases, Daniel Pinto, 51, JPMorgan’s investment banking chief, said that month.
There were encouraging signs toward the end of the second quarter, including an improvement in “some markets activity,” Dimon said in today’s statement. While client activity jumped in June, it didn’t carry over into July, Chief Financial Officer Marianne Lake said on the media call.
Fixed-income trading revenue fell 15% from a year earlier to $3.5 billion, beating the $3.14 billion average of analysts’ estimates compiled by Bloomberg. Equity-trading revenue dropped 10% to $1.2 billion on lower derivatives sales, matching the analysts’ estimates.
JPMorgan’s total revenue of $25.4 billion surpassed the $23.9 billion average estimate of analysts with better-than-predicted results in trading and investment banking.
LPL FINANCIAL (LPLA)
LPL Financial said its second-quarter net income fell about 4.4% from a year ago to $43.09 million — mostly related to unforeseen regulatory costs that increased expenses.
Earnings per share remained flat year-over-year at $0.42 per diluted share, or adjusted earnings of $0.61 per share, for the quarter.
Analysts polled by Thomson Reuters expected the company to report profit per share of $0.61 for the quarter. Earnings per share benefited from a net revenue increase of 7.2%, reporting $1.09 billion in second quarter 2014 compared to $1.01 billion in second quarter 2013.
“We are focused on creating a smarter, simpler more personal LPL to drive productivity and efficiency in our expense structure,” LPL Financial CFO Dan Arnold, stated in a press release. “This quarter we continued to make progress implementing this strategy despite the sequential increase in core [general and administrative] expense primarily related to the resolution of regulatory issues. For the year we remain positioned to lower our overall expense growth rate compared to the prior two years while investing in the company.”
The independent broker-dealer’s core general and administrative expenses were $106 million for second quarter 2014, up 26% year over year.
Roughly 80% of the regulatory fines were rounding errors in transactions that primarily use paper-based products, said Chairman and CEO Mark Casady during the firm’s earnings call. In an effort to mitigate future regulatory costs, Casady added that the company has grown its legal and compliance department by 41%.
Advisory and brokerage assets rose 17.3% year-over-year to a record $465.4 billion, which Casady said in a press release was a result of “positive trends in advisor productivity and asset accumulation.”
“In addition, our higher-margin advisory business continued to attract retail assets under custody and expand at a faster pace than our brokerage business, increasing 26% year over year to $167 billion,” added Casady.
Average yearly fees and commissions per rep are about $251,000 vs. $252,000 in the prior period and $241,000 a year earlier. Commissions per rep are about $155,000 for second-quarter 2014.
The company has 13,840 affiliated advisors, up from 13,409 a year ago.
Assets under custody on LPL Financial’s Independent RIA platform grew 56.6% to $78 billion as of June 30. These results represent 282 independent RIA firms, compared with $49.8 billion and 215 independent RIA firms a year ago.
Revenue generated from LPL’s cash sweep programs declined 20.1% to $24.8 million in the second quarter of 2014 compared with $31.0 million in the year before.
GOLDMAN SACHS (GS)
Goldman Sachs posted second-quarter profits that beat analysts’ estimates as fixed-income revenue fell less than many analysts predicted and investment banking fees climbed. Net income at the New York-based firm rose 5% to $2.04 billion, and revenue rose 6% to $9.13 billion.
Net income climbed 5% to $2.04 billion, or $4.10 a share, from $1.93 billion, or $3.70, a year earlier, the New York-based company said today in a statement. That beat the $3.09 average estimate of 25 analysts in a Bloomberg survey.
CEO Lloyd Blankfein has pledged not to overreact to a trading slump that’s now in its fifth year as he positions the firm to pick up market share from other banks that are pulling back. He is also relying on underwriting stocks and bonds, which accounted for 14% of revenue in the second quarter, the highest portion since 2000.
First-half investment-banking fees saw a sizeable improvement
Revenue rose 6% to $9.13 billion. Compensation, the firm’s biggest expense, climbed to $3.92 billion, or 43% of revenue, the same percentage as a year earlier.
The biggest surprise compared to many analysts’ estimates was the gain on the firm’s equity investments in its Investing and Lending segment, which totaled $1.25 billion. That was almost double the $650 million expected by Barclays Plc analyst Jason Goldberg.
Second-quarter revenue from investment banking, the business run globally by Richard Gnodde, David Solomon and John Weinberg, climbed 15% to $1.78 billion.
The Goldman Sachs figure included $506 million of financial-advisory revenue, including fees for takeover advice, an increase of 4% percent. Revenue from underwriting climbed to $1.28 billion in the quarter, including $730 million from debt underwriting and $545 million for equity offerings.
WELLS FARGO (WFC)
Wells Fargo reported net income in the second quarter of $5.7 billion, or $1.01 per share, up close to 4% from $5.5 billion, or $0.98 per share, a year ago, in line with analysts’ expectations.
Analysts polled by Thomson Reuters expected per-share earnings of $1.01 on revenue of $20.84 billion.
For the first six months of 2014, Wells Fargo reported the net income was $11.6 billion, or $2.06 per share, up from $10.7 billion, or $1.90 per share, for the same period in 2013.
“Our results also reflected strong credit quality driven by an improved economy, especially the housing market, and our continued risk discipline,” said Chairman and CEO John Stumpf in a statement. “We are committed to both maintaining strong capital levels and returning more capital to our shareholders.”
While profit is up nearly 4% from last year, revenue for the second quarter fell slightly compared to the second quarter 2013, to $21.1 billion from $21.4 billion a year ago. But this quarter’s revenue is up from $20.6 billion in first quarter 2014.
Wells Fargo’s Wealth, Brokerage and Retirement unit reported net income of $544 million for the second quarter, a 25% increase from a year ago and a 15% increase from the first quarter.
WBR had $3.6 billion of revenue in the second quarter, up 9% from a year ago and 2% from the prior quarter, as “increased asset-based fees and higher gains on deferred compensation plan investments (offset in compensation expense) were partially offset by lower brokerage transaction revenue,” the bank said.
The retail brokerage had client assets of $1.4 trillion, up 12% from the prior year, and managed-account assets increased $78 billion, or 24% from the prior year. The bank reported strong loan growth, with average balances up 19% from a year ago on growth in first mortgage and security-based lending.
UBS reported that its profit improved by 15% year-over-year to 792 million Swiss francs ($876 million) in the second quarter, beating estimates despite muted client activity and charges resulting from litigation and regulatory matters.