Coverage: Banks having a rough quarter

Banks are having a tough time in 2015. Profits are dropping, trading is down, and the regulatory landscape is murky at best. As of Thursday several of the largest financial firms reported fourth quarter earnings, showing that despite the larger economic recovery, some firms continue to struggle.

The Wall Street Journal story by Christina Rexrode and Saabira Chaudhuri had this wrap of the latest banking earnings:

More than five years into the economic recovery, the nation’s biggest banks are still on the outside looking in, as their fortunes grow increasingly disconnected from the rest of the country’s.

Once looked to as a proxy for the financial health of American consumers and businesses, banking giants are struggling to boost profits despite safer balance sheets, a boom in global deal making and pockets of loan growth.

Bank of America Corp. and Citigroup Inc. on Thursday posted disappointing results. While bank profits have bounced back from the dark days of the financial crisis in late 2008 and 2009, the latest year can be best viewed as an interruption in the recovery.

Bank of America reported that annual net income dropped 58% for 2014 and Citigroup reported its own 47% fall, largely due to regulatory fines and sluggish revenue in both cases. Including annual profit growth at J.P. Morgan Chase & Co. and Wells Fargo & Co., overall net income for the four banks fell 12%.

Investors sold off bank shares. The KBW Bank Index is down 7.5% over the past five trading days, the worst five-day stretch on a percentage basis since November 2011.

Tom Braithwaite and Martin Arnold wrote for The Financial Times that the universal banking model could be coming to an end:

Antony Jenkins, Barclays chief executive, told the FT last month that “the universal banking model is dead” and the bank he took over in 2012 has to be more selective.

Deutsche Bank seems set to be the latest to throw in the towel. Germany’s biggest lender, which until recently was telling analysts it aimed to remain Europe’s last universal bank, is considering spinning off its consumer banking operation as part of a new strategic plan to be announced in the second quarter.

“It is much more incumbent on the few remaining players who are still universal banks to explain and justify why they are sticking at it,” said Marco Mazzucchelli, a senior executive at Switzerland’s Julius Baer who served on a European Union commission that drew up plans for banking structural reform.

“Europe had many universal banks until recently and yet this was inconsequential for economic performance: why should one be concerned if they are no more?” asked Mr Mazzucchelli. “Even if the Americans are not forced to do this by the regulators, they will face pressure to do so from the market.”

John Gerspach, Citigroup’s chief financial officer, said on Thursday: “Everyone goes through various ‘what if’ scenarios. To say we have never ever considered everything . . .  Of course we’ve considered ultimate structures. Over time, we have simplified Citi. Five or six years ago we had a balance sheet of $2.4tn-$2.5tn. Today we’re close to $1.8tn. We’ve sold off multiple businesses. We’ve changed our way of operating.”

John Biers wrote for AFP that investors were not forgiving of the quarter’s results, sending bank stocks down:

Wall Street reacted bitterly to the results, punishing not only the banking sector, but the broader market. The S&P 500 Thursday closed below 2,000 for the first time in a month, falling for the fifth consecutive day.

The weak results from financial firms have quashed the momentum that pushed equity markets to record highs late last year.

“There was so much optimism after the fourth quarter that the worst was behind us,” said Chris Low, chief economist at FTN Financial.

“Nothing is worse for a stock than to think that you’re on an upward trajectory only to discover that you’re not and to realize that there’s still risk.”

The banking results also gave Wall Street an occasion to fixate on gloomy macroeconomic conditions that could batter the sector.

The Associated Press (via The New York Times site) pointed out that the weak earnings had little to do with the overall economy:

Despite slowing growth overseas, the American economy continues to improve. Last week, the government said that the unemployment rate declined to 5.6 percent in December, a six-year low. On Thursday, the New York branch of the Federal Reserve reported that manufacturing had expanded in the region.

Jack A. Ablin, chief investment officer of BMO Private Bank, pointed to a conflict between the economy and the markets.

“There’s a divergence. The financial markets are worried about the impact of plunging oil prices, at the same time the economic backdrop in the U.S. is improving,” he said.

It’s possible that increased lending could boost results in the first quarter as consumer confidence rises. While many are evaluating the universal banking model, it still makes sense to have some exposure to both the markets and consumers. While Wells Fargo seems to have come out ahead this quarter as the only bank of the big four to post a profit, at some point trading will return. The looming question is if regulators will let banks remain universal.