U.S. banks’ big problem even after the recovery: Where’s the growth?
Here’s my big insight for today: U.S. banks have a big long-term problem.
But not the one you’re thinking of right now. (Yes, I do have secret powers and can tell what you’re thinking—although only about bank stocks.)
The headlines are full of news on robo signers, mortgage foreclosure moratoriums, and put backs that will cost banks billions over the next five years and drag out any resolution of the U.S. mortgage crisis.
But that’s not the biggest problem facing U.S. banks or the one that in the long term will doom them to second-class global status unless they can fix it.
What’s that problem? The big U.S. banks—JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C)—are locked out of the fastest growing banking markets in the world (emerging economies especially in Asia) and are locked into some of the slowest growing (the United States and Europe). And I don’t see an easy way in the long term for these U.S. banks to break out of their slow growth trap.
And that—if you agree with the argument I lay out below—should determine how you invest in these stocks, if you invest in them at all.
Let me pick on JPMorgan Chase, the best managed of the big U.S. banks and the one that came through the financial crisis in the best shape, to illustrate the problem. Read more
Citigroup says it doesn’t have a mortgage foreclosure problem
Only one big surprise in Citigroup’s (C) third quarter earnings announced before the New York Stock market opened October 18.
No, not the penny a share in earnings above the Wall Street estimate of 6 cents a share. A slight positive surprise certain was a high probability event after JPMorgan Chase (JPM) surprised last week.
No, not the decline in revenue to $20.74 billion, below the analyst consensus of $21.15 billion and down 5.7% from the third quarter of 2009. That is exactly the problem that JPMorgan Chase reported too and it points to the problems that U.S. banks are having in generating growth in their core business.
No, not even the drop in credit losses that led to the release of reserves against loan losses of about $1.96 billion for the quarter. That’s the expected story at this point in the bank recovery. Read more
Just what Citigroup doesn’t need–more questions about its capital
Exactly how well capitalized is Citigroup (C)?
That’s a question that the Financial Times raised on September 7. The answer, the paper reported, depends on not so much on who’s counting the beans, but on who’s deciding what beans count.
At issue is something called deferred tax assets. A deferred tax asset basically is a loss in the past that can be used in the future to offset taxes. And Citigroup, after pretax losses of more than $60 billion in 2008 and 2009, has a lot of deferred tax assets on its books. About $50 billion of them.
Current accounting rules say a bank can count its deferred tax assets as capital (Hey, don’t ask me how losses can be capital, but that’s what the rules say)—if the bank is confident that will earn $99 billion in taxable income in the next two decades.
And that’s the issue.
Citigroup says, No sweat. The bank points out that it had annual pre-tax profits of $20 annually from 2002-2006.
Some accountants, Wall Street analysts, and even the Securities & Exchange Commission (SEC) aren’t so sure. They say projections are fine and dandy but that Citigroup ought to be creating reserves against the possibility that, in the current global financial uncertainty, the bank won’t record the necessary level of profits. The SEC asked the bank to explain its treatment of deferred tax assets last year. And, as is SEC policy, the agency isn’t talking about whether it still has questions or is satisfied.
The question comes at a very awkward time for Citigroup.
The biggest U.S. banks are finally seeing their need to add new reserves to capital against bad loans decline. If bad loans decline enough, banks will go from having to take money out of earnings to put into reserves to taking money out of reserves and adding it to earnings. The switch will have a dramatic effect on bank profits and losses and that effect is being felt right now and should accelerate in the rest of 2010.
Any autumn rally in bank stocks will be based at least partly on this shift in reserves.
I think you can count on that shift adding to assets at big banks such as JPMorgan Chase (JPM) and Bank of America (BAC).
At Citigroup you can probably count on that shift—but it’s not quite as certain as with other big banks. And that makes Citigroup just a little bit more of a gamble.
Bad news banks: Citigroup and Bank of America results show a slowing U.S. economy
Yesterday’s second quarter earnings report from JPMorgan Chase (JPM) raised concern among investors. The bank reported falling revenue—just 6% it’s true—in its investment banking business. That seemed to confirm concerns that the Wall Street side—investment banking, trading, and the like—of the big banks was slowing.
But today’s earnings reports from Bank of America (BAC) and Citigroup (C) have escalated that concern to at least worry and maybe all the way to fear.
The banks didn’t just show the same revenue problems on the Wall Street side of their business, although that was bad enough. Bank of America, for example showed lower revenue in the second quarter from its trading unit, and Citigroup attributed its decline in second quarter revenue and net income from first quarter levels to lower revenue from parts of its investment banking and trading businesses.
No, the real problem was that both banks showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter. Read more
Citibank has survived but I don’t think the bank has much of a future
“We have turned the corner,” Citigroup CFO John Gerspach, said when he announced Citigroup’s first quarter 2010 financial results on April 19.
But I have to ask, What corner is he looking at?
Can’t be the corner of 40th and Broadway near my office in Manhattan. There a dingy Citigroup branch with beat up ATM machines is barely hanging on in competition with a refurbished JPMorgan Chase (JPM) branch down the block (with ATMs that deposit checks without a deposit slip) and a brand new Capital One (COF) office up the block.
Can’t be the corner of 104th and Broadway near my house where a new Sovereign bank branch is siphoning off accounts from local small businesses that used to be Citigroup customers.
Can’t be the corner of my desk where I’ve got my JPMorgan Chase mortgage bill stacked near my Fidelity credit card bills. I get regular annoying phone calls from Chase asking me if I want to refinance my mortgage. I can’t remember ever getting a mortgage marketing call or letter from Citigroup. And my wife and I once had a Citigroup mortgage and we have an account with the bank.
And this is what’s happening in the bank’s home market and what was once its core business of consumer and commercial banking. If Citigroup has trouble on this turf, you know it’s in trouble everywhere.
The truth is that Citigroup has indeed survived. But that, as hard and desperate as that struggle was, may have been the easy part. (This doesn’t mean Citigroup is out of the woods entirely. It could still get caught up in the kind of legal action the SEC (Securities & Exchange Commission) has filed against Goldman Sachs (GS). For more on what banks might be most at risk see my post http://jubakpicks.com/2010/04/20/an-intelligent-guess-at-whos-at-risk-after-the-sec-charges-goldman-sachs/ )
What’s hard to see is a future in which Citigroup is anything more than an also ran. Read more
