Bloomberg Businessweek
Go To Businessweek.com
During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Adam Johnson talks about what trading vehicles can help you earn more money per trade
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Illustration by Angus Greig
When the financial crisis hit and the economy swooned, Washington first focused on saving the banking industry. Two U.S. Treasury Secretaries and Federal Reserve Chairman Ben S. Bernanke funneled capital and cheap loans to banks with the goal of boosting lending and powering a robust economic revival. It hasn’t worked out that way. While those policies benefited Wall Street, they failed to produce a sustained recovery on Main Street, where the unemployment rate remains above 9 percent. Now a struggling U.S. economy may sap bank earnings and lead to industry job losses and lower stock prices. “The political class is fixated on how the banking system caused the problem in the first place and therefore how it will have to cure it in the future—that if you get the banks working again, the economy works,” says Robert B. Albertson, chief strategist at Sandler O’Neill & Partners in New York. “It drives me into silly laughter. It’s the other way around.”
The nation’s gross domestic product grew at a 1.3 percent annual rate in the second quarter and 0.4 percent in the first quarter, the Commerce Dept. reported July 29. Combined first-half earnings at the 15 largest U.S. banks by assets dropped 17 percent from a year earlier, led by declines at four of the six biggest. While the average estimates of analysts surveyed by Bloomberg show they still expect second-half earnings at the 15 lenders to climb 88 percent from the same period in 2010, some investors are dubious. “I don’t think economic reality has hit estimates yet,” says Matthew D. McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor who helps manage about $4 billion and doesn’t own any of the biggest U.S. bank stocks. “I’ve got to believe that this is going to be a tough quarter.”
Investors are abandoning the sector. Bank of America, the largest U.S. bank by assets, has seen its stock fall 53 percent this year through Aug. 23. JPMorgan Chase, the second-biggest bank, has dropped 18 percent. The 24-member Keefe, Bruyette & Woods Bank Index has declined 21 percent since July 28, the day before the latest GDP figures were reported, compared with an 11 percent retreat in the Standard & Poor’s 500-stock index.
Of course, the banking system and the economy might be in worse shape if not for the policies enacted by Bernanke, former Treasury Secretary Henry M. Paulson Jr., and his successor Timothy F. Geithner. The Fed provided as much as $1.2 trillion in loans to banks and other companies beginning in August 2007, slashed its main U.S. interest rate as low as zero in December 2008, and has engaged in two rounds of purchasing bonds in what’s known as quantitative easing. In October 2008, Treasury began injecting equity capital into banks by purchasing preferred stock. U.S. banks are better prepared to withstand a crisis than they were in 2008 because of the capital and liquid assets they’ve accumulated, according to analysts including Richard Ramsden at Goldman Sachs. “The risk to bank earnings from here therefore appears to be more about an extended low-rate, low-growth environment,” Ramsden and his team wrote in an Aug. 11 note to investors.
Feeble economic growth reduces demand for loans from consumers and businesses, and low interest rates compress the profit on loans the banks do make. In this environment, any growth may have to come at the expense of competitors, says Peter Kovalski, a portfolio manager and bank industry analyst at Alpine Woods Capital Investors who manages about $6 billion. “The overall pie hasn’t increased yet,” he says.
Revenue at the biggest banks is unlikely to be boosted by their Wall Street activities. First-half investment banking and trading revenue declined to $91 billion at the top 10 global banks, from $93 billion a year earlier, according to an Aug. 16 report from industry consultant Coalition Ltd.
