Big Banks Cause Stocks to Tank

07/16/2010 3:37 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Yesterday’s second-quarter earnings report from JPMorgan Chase (NYSE: JPM) raised concern among investors. The bank reported falling revenue—just 6%—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 (NYSE: BAC) and Citigroup (NYSE: 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 US economy is going to slow. (The only good news I can see in these numbers is that I think we can count on the Federal Reserve keeping rates low for an extended, extended period. See this post for more on Fed rate policy.)

It’s that negative read on the US 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 US 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 pm ET, Citigroup shares were down 4.8% and shares of Bank of America had dropped 8.6%. At the same time, the Dow Jones Industrial Average was down 2.2% and the Standard & Poor’s 500 was down 2.5%. 

Full disclosure: I own preferred shares of JPMorgan Chase in my personal portfolio.

Related Articles on STOCKS