Chase's Great Quarter May Be Tough to Match

Venture investments have already lost the big bank $900 million, a dent that may carry over into the coming quarters.
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first-quarter profits sailed comfortably above expectations, thanks chiefly to revenue from its capital markets businesses.

Recent market turmoil, however, could reduce the amount of investment riches at Chase in the coming quarter. Bank executives conceded as much during a conference call Wednesday when they disclosed that public securities in its venture capital unit are suffering a $930 million market loss so far this quarter.

In addition, first-quarter numbers show that the bank is performing patchily on Main Street, as well. Its credit card division is sluggish and the bank announced Wednesday that it took a $100 million charge in its auto loans business in the first quarter, shaving 8 cents off per-share profits.

In the first quarter, Chase generated net income of $1.36 billion, or $1.59 per fully diluted share, which is a 20% increase over the year-ago period, when it earned $1.32 per share. Analysts surveyed by

First Call/Thomson Financial

expected Chase to post $1.55 per share in the first quarter.

Early afternoon Wednesday, Chase's shares were down 3 1/2, or 4.35%, to $77. They are 24% off their 52-week high. Chase didn't comment.

The main sources of earnings in the first quarter were Chase's trading desks, which achieved $1.02 billion in revenue in the first quarter, a hefty 65% above the $618 million registered in the year-earlier period.

In addition, investment banking fees more than doubled to $648 million from $317 million the year before. Private equity gains from the

Chase Capital Partners


examined by

recently, were $500 million, way below the previous quarter's $1.31 billion, but also higher than $325 million in 1999's first quarter.

Combined, these three volatile sectors accounted for 55% of all noninterest income at the bank. Charles Peabody, a banks analyst at New York-based

Mitchell Securities

, says Chase had a pretty good quarter, but wonders whether the markets-based revenue will continue to be strong. "This is going to be a very hard quarter to repeat," he says. (Peabody rates Chase a sell and his firm hasn't done any underwriting for the bank.)

Dina Dublon, Chase's finance chief, said during the conference call: "We will have quarter-to-quarter volatility on private equity gains." But she stressed that most of Chase Capital's strong long-term returns have come from realizing, or selling out of, companies, rather than market gains in the public companies in its portfolio.

The $930 million loss in the value of Chase Capital's public companies so far this quarter does not flow right through to the bottom line.

Dublon said it would be offset by $130 million from the sale of its position in

Triton PCS


; the bank applies a discount to its gains or losses in the unit, which would bring the mark-to-market loss down to $480 million so far this quarter.

Because of the sluggish credit card division and the auto loan charge, the $348 million in first-quarter operating profits at Chase's consumer bank -- which accounts for a hard-to-ignore 40% of revenue -- were 12% below the year-earlier number, and nearly 20% below the fourth-quarter figure. Cards themselves earned $107 million, which was 7% off first-quarter 1999 earnings. The shortfall was due to higher interest rates that reduced the profitability of credit card loans, the bank said.

Dedicated credit card companies, however, have racked up huge growth in first-quarter profits, leading some to wonder whether they are growing at the expense of banks like Chase.

"The monoline

credit-card only companies are better at adapting and acquiring customers than the banks that have been in cards for some time," says Brian Divney, manager of Cherry Hill, N.J.-based

Timberline Financial Partners

, a hedge fund that has no position in Chase.

The $100 million charge was to so-called auto lease residuals. Chase bundles up its auto loans and leases and sells them as bonds, a process called securitization. The retained portion of these securitizations are called residuals, and banks usually value them based on a range of assumptions they make themselves. Chase apparently made the charge because prices in the used-car market had not been as strong as it had estimated.

Also potentially worrying, Chase's costs exceeded revenue in the first quarter. Expenses were 19% over the year-earlier number, while revenue was 16% higher. "Expenses were too high for the level of revenue growth," Chase's Dublon said, but added, "We are taking advantage of good times to invest" in recruitment and technology.