Deep Freeze: Cooling Economy Chills Wall Street
UPDATE: Morgan Stanley was the latest bank to report seemingly rosy earnings. (The bank reported its third-quarter net income was $2.2 billion.) But don't be deceived: The U.S. economy is sending up another distress signal -- bank earnings are suffering as borrowers struggle to keep up on their loans. Reports the FT:
Fears about the health of U.S. consumer balance sheets grew on Monday as Citigroup (C) and Wells Fargo (WFC) joined JPMorgan Chase (JPM) in reporting new signs that homeowners and credit-card borrowers are falling behind on their payments....JPMorgan, a bellwether for the financial industry, also said in its third-quarter report last week that delinquencies on government-insured mortgages had risen. Girding for further deterioration, meanwhile, the company increased how much money it sets aside to cover losses on consumer loans."The residential mortgage problems are unprecedented," said Gerard Cassidy, analyst at RBC Capital. "The rate of improvement in the delinquencies has slowed down dramatically in the last two years and even over the more recent quarters."
The story is similar at Bank of America (BAC), which today boosted its so-called credit-loss provision from the prior quarter. The company's $6.2 billion in profits for the period, up from a $7.3 billion loss a year ago, is deceptive because it includes one-time gains from a number of businesses B of A has recently sold, including its minority investment in China Construction Bank (HKG). Like JPMorgan and Citi, B of A also dressed up its earnings using a "debt valuation adjustment," an accounting stunt that lets banks inflate the value of their debt.
Executives at Citi, which also reported earnings on Tuesday, joined the crowd in sounding a cautious note about the U.S. mortgage market. The bank is seeing a rise in early-stage delinquencies on previously modified mortgages. Wells Fargo (WFC), too, boosted its provision for losses on repurchased mortgages, the first time it's had to do that in several quarters.
Rare loss for Goldman Sachs
In short, what you see with big banks these days isn't what you get. As one credit rating analyst told Reuters:
"We're still going through the numbers, but it looks like the same story as Citi and JPMorgan -- profitability is heavily dependent on credit value adjustments and debit value adjustments, while the core earnings appear very suspect. I'm not very pleased with the results."If retail banking profits are softening, investment banking is turning to goo. Goldman Sachs (GS) today reported a $428 million loss for the third quarter, only the second quarter since the company went public in 1999 that it has lost money. Revenue for the period plunged to $3.6 billion, down from nearly $9 billion in the year-ago period. Sales from underwriting, offering merger advice and other investment banking services took a particular hit, diving 46 percent from the prior quarter.
The upshot: Big banks are feeling the effects of the slowing economy (which doesn't stop them from laying out hefty bonuses). Loan demand remains weak. Returns from trading, which Wall Street relied on for years to drive profits, are spotty. And across the industry low interest rates are also curbing bank profits on their deposits. To make matters worse, fears of a banking crisis in Europe continue to cast a long shadow over American banks.
Wall Street remains in considerably better shape than Main Street, of course. But the idling economy is clearly catching up with the financial industry.
Related: