By Peter Rudegeair 

The big currency swings of the past three months have whipsawed many investors. Wall Street may end up loving the action.

As U.S. banks closed out the first quarter, analysts and investors said the turbulence in foreign-exchange markets triggered by central-bank actions should have boosted profits in the trading units of the country's biggest financial firms. The key will be by just how much and which firm benefited the most.

The start of the European Central Bank's huge bond-buying program and the Swiss central bank's surprise abandonment of its policy limiting the appreciation of the franc sent foreign-exchange markets into a frenzy, boosting the activity and volatility that banks need to juice their lucrative fixed-income trading businesses.

Volatility in the currency markets, which tends to drive sales and trading activity, rose 18% between the start of the year and mid-March, setting the stage for a rebound at banks that deal heavily in those products, according to analysts at Deutsche Bank AG.

Banks tend to make more money when markets jump around, assuming the moves aren't so sharp that they scare investors away or cause the banks' to write down the value of their inventories. Moves likes the ones in the first quarter often prompt investors to change strategies and buy and sell securities through banks' trading desks. The banks generally charge for such trades.

"The foreign-exchange quarter was a blowout," said Nancy Bush, an analyst at NAB Research LLC. "You've got two ingredients there, volume and volatility, and you had both of them in the first quarter."

The performance of the foreign-exchange units may prove the swing factor in a generally good quarter. Overall, when U.S. banks start reporting earnings April 14, analysts surveyed by Thomson Reuters expect the six largest firms to report $21.4 billion in total profit in the first three months of 2014, up 16% from a year ago. The increase is helped by the absence of a $6 billion charge for legal expenses that Bank of America Corp. took in the first quarter of 2014.

This quarter, the legal load may prove to be lighter, and banks' long-suffering fixed-income trading businesses are expected to have come to life.

Foreign exchange makes up about 9% of the overall revenue in fixed-income, currencies and commodities, or FICC, Goldman Sachs Group Inc. analysts say. But this quarter, the bump in business may give foreign exchange an outsize influence and also help related businesses, such as interest-rate trading.

Overall revenue for the six banks is expected to be $105 billion, more or less unchanged from the previous year's quarter, according to Thomson Reuters. The average estimates vary from a 6.1% increase in revenue at J.P. Morgan Chase & Co. to a 5.5% decrease at Bank of America.

But in trading, often an important driver of results in the first quarter for banks, strength in currencies, as well as government bonds and equities, could make the period the first since 2009 in which first-quarter markets revenue rise on a year-over-year basis, said Steven Chubak, a bank analyst at Nomura Holdings Inc.

While the foreign-exchange moves won't affect every big bank, those with large trading operations such as J.P. Morgan and Goldman Sachs could be separated from peers this quarter, depending on how well they traded.

Not all banks were well positioned to take advantage of the abrupt currency movements. Citigroup Inc.'s finance chief said in early March that the bank expected trading revenue to fall by a mid-to-high-single-digit percentage due in part to a "modest loss" related to swings in the Swiss franc.

The New York-based bank might also be disadvantaged by the dollar's rise, since over half of the bank's revenues come from outside the United States, though that will be somewhat offset by lower expenses in those foreign countries, according to Morgan Stanley bank analyst Betsy Graseck.

Another area of weakness could be in the trading of corporate bonds, leveraged loans and other credit-related instruments, which could hurt banks like Morgan Stanley and Bank of America that are dominant in those products, according to Goldman Sachs analysts. Companies issued fewer of those kinds of securities in the quarter, making for a difficult trading environment. "Credit trading tends to feed off primary issuance, and there was a slowdown" in the first quarter, said Charles Peabody, an analyst at Portales Partners LLC.

Lending income, an important driver for big commercial banks like Wells Fargo & Co., is likely to be held down by continued low interest rates and the fact that the first quarter had two fewer days to collect interest on loans and securities than the fourth. Bank of America, for example, expects its net interest income to be a couple of hundred million dollars lower as a result of the lower day count, finance chief Bruce Thompson told analysts in January.

In recent months, shares in the largest banks have underperformed the broader market. The KBW index of bank stocks has fallen 3.1% since the start of the year, while the S&P 500 index has stayed roughly flat over the same period.

The strength in currency trading comes amid an investigation into banks over their foreign-exchange practices. A group of banks including J.P. Morgan and Citigroup are in negotiations with the U.S. Justice Department over allegations the banks manipulated foreign-exchange rates, The Wall Street Journal has reported, even as banks have settled similar allegations with other regulators. The banks have said they are cooperating with the investigations.

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