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.
You don’t get shrinking loan demand in a healthy economy. Consumers and businesses are sitting on the cash they have and not borrowing more because they’re afraid that the U.S. economy is going to slow.
It’s that negative read on the U.S. economy from earnings at these two banks that has sent stocks into a tailspin today. (It doesn’t help that it’s a Friday and no one wants to be long over the weekend.)
Total loans at Bank of America fell 2% in the quarter from levels in the first quarter. That resulted in a 6.2% drop in interest income at the largest U.S. lender.
At Citigroup, the country’s third largest lender, loans fell even more, declining by 4%. That took interest income down 3.6%.
The two banks have led the stock market downward today. As of 2 p.m. New York time Citigroup shares were down 4.8% and shares of Bank of America had dropped 8.6%. The Dow Jones Industrial Average was down 2.2% and the Standard & Poor’s 500 was down 2.5% at that time.
marr.bo,
During a secular bull market, I would agree with you. If you look closely at most of those studies, they were done during the last great bull market at the end of the 20th century, or they covered such a long period of time as to be meaningless. Unfortunately, that doesn’t provide us with a lesson for a secular bear market like we are in now, or for dealing with constantly changing conditions in businesses (for example, the internet was not a serious business consideration in 1990, but it was by 2000).
Is it a slowing demand for loans,, or is it a refusal of the banks to loan ?
I keep hearing that the banks are holding money out of the economy, and that is what is slowing the economy,, ……a contracting money supply.
I dunno.
dandz1356, nocnurzfred, and others–I’m seeing the opposite as you (Utah). “We have cheap money to lend” billboards are popping up all over, mainly for car loans (3.74-3.99%). I just got a letter from a credit union offering a 1% loan transfer bonus up to $250. Everything I’m seeing is from local credit unions, which can be a good size around here. They seemed to be more conservative pre-Lehman to me, so maybe they have plenty cash built up. Surely no sub-prime for them.
Maybe you all can list anecdotal evidence from your home state. From what I’m seeing, it is a mix of lack of loan demand for some banks, and no willingness to lend from others.
is that got anything to do about the new financial regulatory environment, you would think? would’nt the banks had to wait or lobby this political event out first, and see where the environnment will evolve to before commiting to a new lending strategy ? if so, a rebound may appear sooner than feared, providing they do have one ready. could that be possible?
Sorry.
Just noticed the date on this article.
Gettin a little moldy
Off Topic Info:
For those still interested in ORA, I stumbled across this:
http://www.itnews.com.au/News/112017,google-goes-geothermal.aspx
Don’t know if it means a whole lot for this stock.
Banks could be “scared” because they see the NEXT “sub-prime” just ahead, with more write-downs looming. I’m referring to corporate debt of small-to-medium-sized companies, weakened by a softening economy and now missing loan payments. The banks’ “extend, amend, and pretend” game is being challenged by new and expanded FDIC-powers. The CLO market for weaker companies is now closed. Small(er) company loan defaults, asset liquidation, and loan write-offs are the next “sub-prime” challenge.
labradore:
I’d choose Ford over GM too. BTW, I rally hate Ford sold Jacquard.
skoenig:
Go one step further. What CTREATED the “uncertainty”?
dandz1356:
I think both are true. Businesses are reluctant to borrow. Those who do, then the banks got so ‘scared”. I heard extremely qualified people got turned down. It makes me thinking that banks shouldn’t be in the lending business at all if they are so “scared” to even lend to the best possible borrowers.
To all those who made a “kill”:
Congratulations!
65 expected to apply for every job opening at Delta alone! I told so. Forget about higher wage or something. We should be glad that companies (at least some) are still hiring.
http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches.aspx?post=1782865
grindy2424,
The problem I see with the commodity shorts, and I am still short on base metals, is: What will the dollar do? If the dollar can maintain a relatively consistent level (or even go up), then the commodity shorts are a good play.