Wall Street banks line up to deliver strong profits

Arguably the star performer to emerge from the financial crisis, JP Morgan is set to kick off the US banking industry's earnings season today with a first quarter profit expected to be about $2.9bn (£1.8bn). Although a sharp increase from $2.14bn a year ago, that number is a drop from JP Morgan's profit of $3.28bn during the final quarter of 2009 as losses from credit cards, delinquent mortgages and consumer loans take their toll. They may be out of intensive care but top US banks are still nursing patchy health, with a gap growing increasingly wide between Wall Street's return to multibillion-dollar profits and sluggish business at high street branches. The 'haves‚' and the ‚'have nots‚' are gradually making themselves known. Powered by resurgent stockmarkets and a revival in deal-making activity, Goldman Sachs and Morgan Stanley are expected to deliver solid figures, fuelling the prospect of fresh telephone number-sized bonuses for 2010. But further down the banking rankings, times are still hard with unpleasant surprises still to emerge. Jason Goldberg, banking analyst at Barclays Capital in New York, predicts that 15 of the banks he covers will turn a profit for the first quarter, with 10 remaining in the red – including many of America's mid-sized regional banks. "I still think we have a little way to go to work through this credit cycle," says Goldberg, who stresses that the industry is a long way from returning to business as usual. "Normality is still a 2012 or 2013 event. And we're still defining what 'normal' now means." Lingering uncertainties surround regulatory reform, with legislation subject to wrangling in the Senate where Republicans oppose the Obama administration's effort to introduce a "Volcker rule" banning certain risky types of trading. And the economic environment remains rocky – the National Bureau of Economic Research is yet to declare an official end to the US recession, worrying that a double dip in the downturn could yet materialise. Citigroup, one of the malingerers of the crisis which required a huge $45bn government bailout, is likely to be at, or around, break-even as it writes off as much as $10bn in bad loans. Bank of America is likely to do better, aided by a rise in trading revenues of as much as 15% at its Merrill Lynch brokerage. In a research note, banking analyst Moshe Orenbuch of Credit Suisse said of the industry: "The operating environment remains challenging, with lacklustre loan and balance sheet growth. That said, we expect to see abatement in provisions and reserve build and incremental improvement in NPAs [non-performing assets]". Predicting the size of delinquent loans disclosed on banks' balance sheets is a subjective business. But an independent banking analyst, Bert Ely, says the decent players are beginning to stand out: "We're going to start getting a clearer fix on things. The stronger ones, without quite the credit quality problems, will start to break out of the pack."