Bumpy earnings season ahead for banks
Posted: 12:54 pm Wed, January 11, 2012
NEW YORK — You can usually tell a lot about the health of the U.S. economy by looking at the financial results of banks. They’re the people who finance new factories, plant expansions and fatter payrolls.
But don’t count on that over the next two weeks, when banks report their results from the last three months of the year.
Americans ran up credit card balances, businesses borrowed more, and historically low mortgage rates encouraged people to refinance mortgages. All good for the economy, and for banks, too.
But the banks took a hit because the European debt crisis made stock and bond markets jumpy.
A rule restricting debit card fees that took effect Oct. 1 will take another bite out of revenue, as will an obscure accounting rule that requires banks to take a loss when the value of their debt rises.
JPMorgan Chase will be the first major bank to report results Friday, followed by Citigroup, Wells Fargo, Goldman Sachs, Bank of America and Morgan Stanley next week.
Wells Fargo, the only major commercial bank without a large investment banking division, is expected to come out ahead of its peers Citi and JPMorgan. Traditional investment banks Goldman and Morgan probably found it hard to escape a hit to the bottom line because of market volatility.
Big banks are under pressure from international regulators to hold on to more cash and reduce riskier lending so they can weather sharp economic downturns or a financial crisis.
Stress test result coming
On Monday, the 19 largest U.S. banks submitted to their annual stress test, with results due in March. The Federal Reserve will determine whether they have enough cash and cash-like securities on their balance sheets to offset potential losses from risky loans. The Fed can order unhealthy banks to raise more cash or preserve some by not paying dividends.
Moshe Orenbuch, a bank analyst for Credit Suisse, says American banks have become resilient and expects all the banks to pass their stress tests this year. Orenbuch expects both JPMorgan and Citi to increase their dividends later this year.
Banks brought in $13.9 billion in investment banking revenue, down 37 percent from the year before and the lowest since the first quarter of 2009, the depths of the financial crisis, according to Dealogic, a provider of financial data.
Weaker investment banking results should also mean smaller bonuses for Wall Street bankers, something investors — not to mention Occupy protesters and political scientists — will watch closely.
Also hurting the banks’ bottom line, a law championed by Sen. Dick Durbin, D-Ill., caps the amount banks can charge stores for debit card transactions at 24 cents. Before the law, the average debit card transaction netted the bank 44 cents.
Major banks also had planned to impose debit card fees — as much as $5 per month from Bank of America. They backpedaled after a public backlash, but it will hurt quarterly earnings. Bank of America expects $475 million in lost revenue, JPMorgan $300 million and Wells Fargo $250 million.
Banks will also take a loss from an accounting rule that applies to the value of their own corporate debt. If the value of debt they have issued rises, it would cost the banks more to buy back that debt in theory. Corporate debt prices bounced back late last year after falling in the summer, when one agency stripped the United States of its top-notch credit rating.
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