Don't Bank on the Banks
01/15/2010 12:43 pm EST
Can’t anybody run a bank anymore?
I don’t mean an investment bank that makes its money from trading, managing stock and bond offerings, and inventing new financial instruments. That’s a good business these days for everybody from Bank of America (NYSE: BAC) to JPMorgan Chase (NYSE: JPM). (At Goldman Sachs Group (NYSE: GS), it’s a great business.)
I mean a bank that takes deposits and makes loans through such bread-and-butter products as mortgages and credit cards.
JPMorgan Chase is one of the best at that business. But even that bank, it admitted in its fourth quarter 2009 earnings report issued this morning (January 15), just keeps generating losses in its traditional banking businesses.
Investors who were hoping to see signs that the end of trouble in retail and commercial banking was near have sent shares down almost 2% by noon.
Here’s the problem in JPMorgan Chase’s earnings.
The top-line number looks great: Fourth quarter earnings of 74 cents a share, or $3.3 billion, were 13 cents a share better than Wall Street had expected and way above the six cents a share and $702 million the bank reported in the fourth quarter of 2008. Revenue climbed 32% from the fourth quarter of 2008 to $25.2 billion, although they still came in below Wall Street’s projected $26.8 billion.
But more than half of that profit came from the company’s investment banking business, which posted net income of $1.9 billion for the quarter. Fixed-income trading contributed another $2.7 billion to net income.
And the bank’s traditional banking businesses?
Well, income in the commercial banking unit—the one that makes loans to businesses—fell to $244 million in the quarter (from $480 million in the fourth quarter of 2008) as the bank boosted reserves for losses by another $304 million on continued weakness in commercial real estate.
(Watch out, regional and local banks! Smaller banks have a much higher percentage of their portfolios locked up in commercial real estate loans than a money-center bank like JPMorgan Chase does.)
And the consumer bank turned in another terrible quarter with a $399-million loss. The retail banking part of the consumer banking unit posted a $1-billion profit, but that was more than offset by a $1.4-billion loss from consumer loans. The credit card division alone lost $306 million in the quarter.
The net-charge-off rate on credit cards for bad debt fell to 9.3% in the quarter from 10.3% in the third quarter of 2009, it’s true, but that still left the rate well above the 5.6% charge-off level of the fourth quarter of 2008. And JPMorgan Chase’s chief financial officer really disappointed investors and analysts when on the company’s conference call he noted that he couldn’t say that the bank has reached the peak of the reserves it must put aside for bad debt.
This much bad news from the strongest of the big banks (I don’t call Goldman Sachs a bank no matter what the paperwork at the Federal Reserve says) doesn’t bode well for next week’s earnings reports from Citigroup (NYSE: C) on January 19 and Bank of America and Wells Fargo (NYSE: WFC) on January 20. For more on the continued turmoil in the retail banking unit at Citigroup, see this recent post.)
And with the stock market as a whole dependent on the financial sector for leadership in recent days, next week could be a volatile one for stocks in general.
Full disclosure: I don’t own shares of any company mentioned in this story.