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Streetwise U.S. bank earnings a mixed bag as Canadian sector looks south

The headquarters of Goldman Sachs in lower Manhattan.

Michael Appleton/The New York Times

America's largest banks reported better-than-expected earnings growth in the first quarter of 2017, but a closer look at results reveals a mixed bag of hits and misses.

U.S. banks were looking to rebound from a gloomy first quarter a year ago, when falling oil prices and unfavourable trading conditions weighed on results. Since then, the arrival of U.S. President Donald Trump has brought bold promises of deregulation and tax reform to accompany rising interest rates, creating a wave of bullish optimism on Wall Street.

Several of Canada's largest banks are looking to the U.S. market to help propel their own earnings growth, as the Canadian economy remains sluggish. Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal all have substantial U.S. operations. And Canadian Imperial Bank of Commerce is looking expand across the border, should its proposed $4.9-billion (U.S.) purchase of Chicago-based PrivateBancorp Inc. win approval from shareholders at a May 12 vote, and from regulators.

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But it's not all smooth sailing in the U.S. markets. There is growing uncertainty about the Trump team's ability to deliver on its promises in a timely fashion, or even at all.

Here are three key areas worth watching from the U.S. banks' results.

Trading revenue

Perhaps the most-talked-about revelation was a rare stumble by Goldman Sachs Group Inc. in bond trading. On Tuesday, the firm said it recorded $1.69-billion in revenue from fixed-income trading, which is "essentially unchanged" compared to 2016. What's the big deal? Well, Goldman's chief rivals all posted big gains in this segment during the three months to March 31.

JPMorgan Chase & Co. recorded fixed-income revenue of $4.2-billion, up 17 per cent from last year. Citigroup Inc. saw a 19-per-cent jump to $3.6-billion. Bank of America Corp., for its part, reported a 29-per-cent increase to $2.9-billion. And finally, on Wednesday, Morgan Stanley said its fixed income markets revenue nearly doubled to $1.7-billion.

Why was Goldman flat while the others enjoyed gains? Goldman said it generated "significantly lower" net revenues in commodities and currencies, as well as "lower" net revenues in credit products. It said that its results were hampered by political uncertainty, low levels of volatility and low client-activity levels.

"Ultimately, we didn't navigate the market well," Martin Chavez, the firm's new chief financial officer, told analysts on a conference call. "But no quarter defines the franchise."

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Loan growth

Even amid an economic expansion in the United States, businesses aren't exactly lining up to borrow more from banks. Though average loans grew modestly from a year ago, most totals stayed relatively flat compared with the fourth quarter of 2016. JPMorgan, Wells Fargo & Co. and Bank of America all missed analysts' expectations for first-quarter loan growth.

One reason could be that companies are turning to welcoming capital markets to raise money, rather than borrowing from banks. But there are industry trends keeping loan growth subdued as well. JPMorgan chief executive officer Jamie Dimon said slower growth in mortgages and auto sales were flat quarter over quarter, but he sought to assuage concerns.

"I wouldn't overreact to the short-term thing about loan growth, because there's so many things that affect it," he said.

Rates and margins

The U.S. Federal Reserve has so far delivered an expected shot in the arm, hiking interest rates in December, then again in mid-March. That should be friendly to banks, widening the spread between their own borrowing costs and what they charge clients for loans.

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At JPMorgan, the net interest margin (NIM) – which helps measure the difference between what a bank earns on loans pays on deposits – spiked by 11 basis points to 2.33 per cent. That was six basis points ahead of estimates from RBC Capital Markets analysts. (100 basis points equals one percentage point). Bank of America's NIM also rose to 2.39 per cent, two basis points ahead of expectations.

Other banks have yet to see the same benefits, however, which suggests the impact of higher rates could take time to show results. Wells Fargo's NIM was flat compared with the prior quarter, and shy of expectations, while Citigroup's margin declined noticeably.

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