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Word that a banking pool had returned its money to investors prompted our assistant managing editor to take a second look at the state of banking. The answers are discomforting.
October 4 -
Sandler O'Neill & Partners analyst Kevin Fitzsimmons on Friday lowered his 2012 earnings estimates for 11 regional and community banks amid concern about weak loan demand and mounting pressure on net interest margins.
September 23
Banks start reporting quarterly results next week, and it's no secret that profits will slow thanks to the sluggish U.S. economy.
So the big question facing banks this earnings season is how they plan to deal with plunging stocks and the Federal Reserve's plans to hold interest rates in check for another two years.
Those developments have upended analyst and investor predictions about bank profits in 2011 and 2012. Do not be surprised if bankers sound as baffled as everyone else when they start taking questions about the third quarter and beyond. JPMorgan Chase & Co. will be the first big bank to report, on Oct. 13.
"Earnings conference calls could be a little frustrating. You are not going to have the ability to get the answers that you want," said Jefferson Harralson, an analyst with Keefe, Bruyette & Woods Inc.
"We know banks cannot generate historic types of profitability levels on this yield curve. We know the banks are taking a very hard look at expenses," Harralson added. "What can you do, and what are your options? For the most part, they don't know."
Low interest rates mean banks cannot begin charging borrowers more. Deposit rates have bottomed out. Loan demand is nonexistent outside a few niche areas.
Though some banks have begun raising fees on checking accounts and debit cards, it is unclear whether customers will revolt or accept those changes.
Margin contraction is inevitable.
KBW predicts that median earnings per share will fall 1% in 2011. It tracks 188 banks.
The historic solution for this dilemma — mergers — is off the table. Banks buy other banks by issuing stock. That is infeasible in a chaotic equity market. Banks also have to deal with new accounting rules that basically force them to book up front any loan losses they expect their acquisition to incur. That raises the hurdle for deal returns.
"There haven't been a lot of M&A deals going on," said Richard Mui, a bank analyst with Jefferies & Co.
That leaves banks with two means to boost profits back toward pre-crisis levels.
They can cut costs and poach customers from rival banks. Though these two things are easier said than done, market watchers are eager to learn how banks intend to become lean, mean, market-share-grabbing machines.
Some banks have been earlier than others in moving forward with a second, post-crisis round of cost cuts. Bank of America Corp. expects to save at least $5 billion via layoffs and other measures over the next two years, while SunTrust Banks Inc. plans to cut $300 million by the end of next year by consolidating vendors and closing branches, among other things.
Most other banks are still in the early stages of figuring out where to cut and by how much.
In past quarters, the industry's big areas of concern have tended to be credit quality and loan growth. Though analysts are moderately worried that the industry's loan losses could deepen on renewed economic uncertainty, several large banks eased those fears in September during Barclays Capital's annual banking conference in New York.
BB&T Corp. and PNC Financial Services Group Inc., among others, said loan problems continued to dwindle through the quarter.
Banks' lending rut, meanwhile, is an old story with no happy ending in sight.
The industry's post-recession loan growth has not been this tepid since the Great Depression, and banks are on track to shrink loans in 2011 for the third consecutive year, Wells Fargo & Co. senior analyst Matthew Burnell wrote in a research note last week.
Even the few bright spots in lending barely shine.
Mortgage refinancings are rising thanks to low rates, but that market is spotty and unreliable. Also, refinancings are about market disruption, not growth. Customers tend to leave their existing bank to refinance with another, so for every winner there is a loser.
Auto and business loan demand has been rising, but yields on those types of loans keep falling because intensifying competition has led to pricing wars.
Also, a lot of the banking industry's commercial lending growth in the last six months has been driven by corporate mergers, a trend that may have petered out. Manufacturers and service providers that had been warming to the idea of taking out loans may be changing their minds, experts say.
