Bad news banks: Citigroup and Bank of America results show a slowing U.S. economy

07/16/2010 2:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

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.

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