Capital Markets

Dreary Spring for Wall Street

The largest universal banks in the United States had a tough time growing their businesses in the second quarter, say analysts.
Vincent RyanJune 30, 2011

The biggest Wall Street banks — in particular the so-called universal banks, which not only lend but also provide underwriting and investment advisory services — are set to report disappointing second-quarter earnings, say bank analysts.

The universal banks — Bank of America, Citigroup, JP Morgan Chase, Goldman Sachs, and Morgan Stanley — will report a 10% linked-quarter decline and 8% year-over-year decline in revenue for the June quarter, according to a Keefe, Bruyette & Woods report. Moreover, profits will be lower than initial estimates for four of the five, says KBW.

The fifth, Bank of America, was expected to post earnings of $0.26 per share, but that number is out the window. On Tuesday BofA announced a $14 billion charge to settle claims by private investors in mortgage-backed securities and to cover future exposure to mortgage-repurchase claims by Fannie Mae and Freddie Mac. The bank now expects to record a net loss of as much as $9.1 billion in the second quarter, or $0.93 a share.

A principal reason for the poor results across the five banks is lower trading volumes in their investment-bank businesses, which occurred as investors “scaled back risk-taking strategies,” says the KBW report. Worries over Europe and macroeconomic growth back home lowered trading in fixed income, currencies, and commodities by an aggregate 35%, while equity trading fell by double digits.

In the traditional deposit and loan businesses, universal banks’ earnings continued to be squeezed by low net interest margins. The profits produced from the difference between what banks pay for deposits and earn on loans have been sliced by greater competition in lending and the runoff of certain high-yielding assets, such as credit cards for subprime borrowers.

The one bright spot for the universal banks is that portfolio credit quality continues to improve. That will allow them to release reserves they have been holding to cover expected loan losses. BofA, Citi, and JP Morgan Chase will release significant reserves in the quarter, says KBW, and will continue to do so through the end of 2013. “We believe that the reserve releases may serve as a bridge until the universal banks can reach more normal earnings power,” the KBW report says.

For U.S. banks overall, while portfolio quality is improving, loans still aren’t growing. “While banks are making loans, good balance sheet growth is still a challenge for the industry given the undercurrent of banks reducing current risk exposures — whether it be deal-acquired assets or risky assets that receive onerous treatment under pending Basel III capital rules,” says a Credit Suisse U.S. bank earnings preview released Thursday.


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