BOSTON (TheStreet) -- Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. Report, JPMorgan (JPM) - Get JPMorgan Chase & Co. Report, Citigroup (C) - Get Citigroup Inc. Report and Bank of America (BAC) - Get Bank of America Corp Report all beat analysts' earnings estimates for the most recent quarter. But they got there in different ways.
Traditional investment-banking services, such as securities underwriting, are just a fraction of a bank's business these days, so investors must consider a more complex web of factors when deciding which banks to invest in.
Revenue has been getting a huge boost from brokerage services, helped by the same forces that almost brought banks to their knees in 2008. As investors fled risky securities, only to jump back in during recent months, banks collected fees and commissions along the way.
Banks' brokerage fees tally billions of dollars per quarter. In times of great uncertainty, as in 2008 and last year, trading becomes more frequent, so there are more chances for banks to take small bites for themselves. JPMorgan and Goldman Sachs are by far the biggest brokers, but all other major banks also wet their beaks in the same pond.
The problem for investors is that brokerage revenue is unpredictable, so it's difficult to guess that blowout earnings in one quarter will carry into the next three months.
Once stock or bond markets cool after a hot period, trading revenue peters out. As a result, it's important to identify businesses that enjoy evergreen sources of revenue. Banking relationships in which customers pay fees for services, for example, is a good source of revenue that's relatively consistent. Customers are reluctant to move their money to an unfamiliar bank.
When considering retail-bank and card services as a share of total revenue, Bank of America, surprisingly, isn't top-ranked. JPMorgan is, with 52% coming from those sources. Bank of America and Citigroup come in at less than 45%. JPMorgan, therefore, is less volatile and, by definition, less risky.
Most banks have come under fire for raising credit-card fees and, essentially, kicking consumers while they're down. While banks claim the fee increases are necessary to compensate for risks in consumer lending, their profits aren't feeling much of a pinch. JPMorgan's card-service revenue increased by 23%, or about $4 billion, last year.
Banks seem to mint money, but not all of the services that help them rake it in are consistent. When evaluating banks, especially those with a big exposure to capital-market services, be sure to evaluate the staying power of the sources.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.