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Tuesday, Jun 6, 2023

BANKS —With Strong Investments, Banks’ Profits Keep Climbing

Banks based in Los Angeles or with a significant presence here posted strong first-quarter earnings, in no small part due to the robust capital markets that only recently have weakened.

The strong performance in technology stocks in the first part of the year helped boost the investment portfolios and therefore the earnings of many banks. That performance is unlikely to be duplicated in the coming months because tech-stock enthusiasm has dimmed considerably.

Noting that the economy may be slowing, banks are now becoming increasingly vigilant about credit quality and are taking pains to boost their loan loss reserves.

“I think it’s obvious that the first quarter and beginning of the year were as good as it gets,” said Derek Derman, bank analyst at Wedbush Morgan Securities in L.A. “Any bank involved in anything from traditional investment banking to venture capital is going to be impacted (in future quarters) because that level isn’t going to be sustained. But banks are being aggressive in raising reserve levels and preparing for the worst.”

For the two banks with the biggest presence in L.A., the first three months of the year went very, very well.

Bank of America Corp.’s net income for the first quarter ended March 31 rose 17 percent to $2.24 billion ($1.33 per diluted share), compared with $1.91 billion ($1.08 a share) for the year-earlier period. From its $5 billion venture-capital operation, the bank posted $563 million in gains in the first quarter.

The roaring financial markets also boosted profits at Wells Fargo & Co. The bank, which has been an active equity investor in emerging growth companies, reported a staggering $885 million in venture-capital gains in the latest quarter, and net income rose to $1.01 billion (61 cents a share), from $884 million (53 cents a share) a year ago.

Saving for a rainy quarter

Wells Fargo in particular did a good job of using its investment gains to shore-up its balance sheet. It wrote off non-performing assets and then offset the resulting charges with its first-quarter investment gains. The San Francisco-based bank recorded a $602 million loss on sales of certain securities as part of a continuing restructuring of its investment portfolio, and also took a $160 million charge to write down the value of certain auto-lease investments.

“They made the most of their outsized gains,” said Jim Bradshaw, a banking analyst at D.A. Davidson & Co. “They put some away for a rainy day.”

The L.A.-based bank that has been more aggressive than any other in investing in the technology market is Imperial Bancorp, and it too reported strong earnings. The Inglewood-based bank said its first-quarter net income rose 36 percent to $19.3 million (41 cents a share) from $14.2 million (30 cents) in the year-earlier quarter.

Imperial’s income from warrants and investments in venture capital funds rose to $15.4 million, up from $4.2 million in the first quarter of 1999. And even in the wake of the Nasdaq selloff in mid-April, Imperial’s unrealized gains from equity positions in public companies stood at almost $32 million as of April 19, the day the company announced its earnings.

“Combine that with the $15 million in warrant income for the first quarter and it’s $47 million, which is more than we had (in unrealized stock gains) in January,” said Dennis Lacey, Imperial’s chief financial officer. “Hopefully we won’t have another (Nasdaq) meltdown like that, but even so, we’re still picking up.”

Loans drive growth, too

Banks didn’t have to be investing in the markets to enjoy strong profits.

City National Corp. posted record net income of $31 million (66 cents a share) in the first quarter, up 19 percent from $26 million (55 cents) a year ago. The Beverly Hills bank only recently entered the emerging growth market, but strong loan demand continued to drive the company’s profits.

The bank’s earnings “were very strong, much better than expected,” said Joe Morford, a banking analyst at Dain Rauscher Wessels. “It’s their 23rd quarter of double-digit earnings. Their profits are among the best in the industry.”

“A lot of the banks that don’t have anything to do with the investment world did just fine,” added Wedbush Morgan’s Derman. “Look at East West. They really have no exposure whatsoever.”

East West Bancorp, the largest of the local banks catering to the Chinese-American market, saw earnings rise by 45 percent to a record $8.7 million (38 cents a share) from $6.0 million (26 cents) a year ago.

All of these banks continue to keep loan loss reserves at or near 2 percent of total outstanding loans, and bank analysts said that, while rising interest rates and inflation may continue to hurt both margins and share prices, the outlook remains bright.

“For four quarters in a row, banks have been telling me things can’t get any better, and they have,” Bradshaw said.

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