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Bank profits not as impressive as they seem – Wall Street

This article was posted on Jul 18, 2009 and is filed under Market Outlook

Banks turn in hefty profits, but industry still has big problems

NEW YORK (AP) — The big banks are making big money again, but they won’t be back to health as long as they have to deal with a recession and customers defaulting on mortgages and credit cards.

The impressive numbers included a $3 billion second-quarter profit announced Friday by Citigroup and $2.4 billion for Bank of America. They followed similarly robust earnings for Goldman Sachs and JPMorgan Chase.

That the banks managed to turn a profit at all is remarkable. Just 10 months ago, many of them looked to be on the verge of collapse. The stock market staged a huge rally this week, driven by the signs of health in banking.

But Bank of America CEO Ken Lewis had some sobering words during a conference call with Wall Street analysts after his company’s results were released Friday: “Profitability in the second half of the year will be much tougher than the first half.”

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading — not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage.

Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do.

Bank of America, JPMorgan Chase and Citigroup Inc. all reported they lost more money on loans during the second quarter. Bank of America alone set aside $13.4 billion to cover loan losses. But the banks also saw signs that loan delinquencies were starting to stabilize.

Celent analyst Isabel Schauerte said Bank of America’s earnings tell the story of the financial industry.

“B of A’s results are the bellwether of where Main Street is headed. Measured by credit losses, a moderation of default rates is not in sight,” Schauerte said. “For the investment banking business of B of A, in contrast, the worst days seem to have passed.”

President Barack Obama’s top economic adviser said the signs of improvement displayed by the banks would not have been possible without government infusions, guarantees and other programs provided by the government.

“There is no financial institution that would be reporting the kind of positive results that we have seen in the last quarter but for the extraordinary public support provided by the government,” said Lawrence Summers, the director of the White House’s National Economic Council.

The profits announced this week raise more questions about when banks will be able to repay their bailout money. Goldman Sachs and JPMorgan Chase have already repaid their loans. Others, like Bank of America and Citigroup, have not.

“Moving forward, companies that are solvent and performing should be held to the promise to repay the taxpayers with interest,” said Rep. Darrell Issa of California, the top Republican on the House Oversight and Government Reform Committee, which is convening a hearing next week on bailout oversight.

The banks that reported earnings this week cited similar trends:

— Mortgages: Bank of America’s second-quarter revenue was bolstered by a spike in mortgage refinancings as interest rates tumbled early in the quarter. But rates have been climbing lately, and analysts expect that surge in refinancings to taper off. And more people are defaulting on mortgages.

— Credit cards: Credit card losses tend to track the unemployment rate, and banks are expected to keep losing money on credit cards as more people lose their jobs. JPMorgan Chase, Citi and Bank of America all have huge credit card operations.

— Investment banking: By far the quickest recovery in the banking business has come in the investment banking sector, helping Goldman Sachs earn $2.7 billion in the second quarter. Some of the rebound has come from the big stock market rally this spring. Companies also did well because there’s less competition since Lehman Brothers and Bear Stearns went under.

Analysts say that besides the problems with loans, bank earnings may suffer because the country has less of an appetite for debt.

— Commercial real estate: While home foreclosures are increasing, the commercial real estate market is expected to keep causing loan losses for banks. Rising store and office vacancies are cutting into landlords’ and developers’ cash flow, and leading them to default on their mortgages.

Ieva M. Augstums reported from Charlotte, N.C. Associated Press Writer Anne Flaherty in Washington, D.C., also contributed to this story.

Source: yahoo finance

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