Banks rely on lending as trading profits dip

By John W. Schoen, Senior Producer

The nation?s biggest banks are getting back to the business of writing loans to businesses and consumers after another year of dismal returns from in-house investment trading.

That increased lending, by itself, won?t add much to future economic growth, though, at least not unless the economy grows and creates more loan demand. But as businesses?-- especially small and medium-sized companies ?-- get back on their feet, they?re going hat-in hand to the bankers for financing, much of it for new equipment and technology to boost output.

"We see a mild recovery which actually might be strengthening, and it's broad," JPMorgan Chase CEO Jamie Dimon told investors after reporting its latest quarterly profits Friday. "Hopefully, it will add to more jobs. We have seen jobs growing ... it's not enough but it could be self-sustaining."

JPMorgan, the biggest U.S. bank, kicked off the latest round quarterly profit reports, followed by Citigroup and Wells Fargo on Tuesday. Bank of America, Goldman Sachs Group and Morgan Stanley report later this week.

It wasn?t a great quarter. Though business loan demand was up, mortgage lending remains deeply depressed. And trading profits from investment banking fell sharply. That?s pushed bank stocks to record lows compared with the companies' earnings and net worth, a measure known as book value.

All of which means bankers have a lot riding on the continued growth in the economy, which helped drive the pickup in lending. As the economy gained momentum in the last three months of the year, large banks booked 5.2 percent more business loans in the fourth quarter, according to Federal Reserve data. That?s up from gains of 3.1 percent and 3.4 percent in the two previous quarters. JPMorgan said its commercial loan portfolio grew by 13 percent in 2011.

Besides the gradual improvement in U.S. economic growth,?bankers are picking up new loan customers as European bankers pull back and hoard cash to weather the widening debt crisis in the eurozone. Wells Fargo said Tuesday its loan portfolio grew about $9.5 billion in the fourth quarter, some of which analysts say included U.S.-based commercial real estate loans bought from European banks.

But Europe?s woes have been a mixed blessing for American bankers. As the turmoil has rocked the global financial markets, big U.S. banks have seen their trading profits?shrink.

On Tuesday, Citibank told analysts its investment clients have been spooked by the European crisis, continued stock market turmoil and worries about the global economy, all of which cut into investment banking profits. JPMorgan said Friday its investment banking revenue fell 30 percent, hurt by a 39 percent drop in underwriting and advisory fees, a 13 percent decline in bond trading, and a 31 percent drop in stock trading.

Across the industry, investment banking revenue declined 9 percent in the last three months of 2011 compared with the third quarter, which was already weak, according to a report by JPMorgan?s bank analyst, Kian Abouhossein. That includes a 17 percent drop revenue from in deal-making, a 3 percent drop in bond trading revenue and a 2 percent drop in stock trading revenue.

It may be a while before big banks see a return to the glory days of fat profits from investment banking. The S&P 500 stock market index ended 2011 almost exactly where it began. With the global economic outlook so uncertain, companies have curtailed mergers and acquisitions, traditionally another major source of profit for the biggest U.S. banks. Record low mortgage and corporate bond rates have o cut into the profit margins bankers earn from writing new loans too.

With big trading profits gone, big banks are relying more heavily on consumer borrowing. For the first time in three quarters, JPMorgan booked more income and revenue from its credit card and card loan businesses than from any other line of business. Consumer credit made up 28 percent of total profit, while investment banking income fell by 52 percent and now makes up less than 20 cents of every dollar of the banks' total profits

CNBC's Mary Thompson provides insight on Wells Fargo and Citigroup earnings and what they reveal about the broader sector.

With the U.S. housing market still mired in a deep slowdown, big banks face another tough year. Record low new-home sales and a glut of unsold existing homes have cut deeply into the demand for mortgages. Banks are still trying to shake off mortgage-related losses left over from the bad loans they made during the housing boom. And they face an unknown legal liability from ongoing lawsuits by state prosecutors and private investors. In the fourth quarter of last year, JPMorgan set aside more than half a billion dollars for mortgage-related litigation.

To make up for the lost profits, big banks are cutting expenses. Bank of America has said it will jettison 30,000 jobs in the next few years. Wells Fargo has said?it needs to cut quarterly expenses by $1.5 billion by the end of this year, including job cuts. Morgan Stanley and Goldman Sachs, which generate a bigger share of profits from investment banking, have announced big cuts in bonuses this year.

Related story: Americans raid savings, putting recovery at risk

Source: http://bottomline.msnbc.msn.com/_news/2012/01/17/10176163-banks-rely-on-lending-as-trading-profits-shrink

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