In a bad economy, banks trade their way to profits
NEW YORK — The big banks are showing they can still make money, even as Main Street struggles — though not from lending, refinancing homes or other bread-and-butter business.
Instead, they’re doing what Wall Street does best — betting big on stocks, bonds, commodities and other assets.
Citigroup, the shakiest of the major banks during the financial crisis, reported Thursday it eked out a quarterly profit from trading, despite suffering more losses on consumer loans. Trading also drove big profits at Goldman Sachs and JPMorgan Chase.
That some banks are making money now is a sign of remarkable recovery from the crisis a year ago. But the lopsided business model raises questions about what happens if trading profits fall off and banks are left to rely on more traditional operations.
After all, the economy is still struggling to recover, unemployment is approaching 10 percent and Americans are saving money and trying to pay down debt, not taking on more.
“The good news is that banks are in better shape. The bad news is that they’re not making loans to consumers and businesses,” said market analyst Edward Yardeni. “That could come back to bite them because these trading gains will only last so long.”
Mindful of the problems banks still face, investors reacted cautiously a day after the Dow Jones industrials powered back above 10,000 for the first time in a year. Stocks zigzagged for most of Thursday before ending modestly higher.
For now, trading is pretty much the only way banks can make money. And it’s more lucrative because there are fewer competitors, interest rates are near zero and government subsidies have allowed banks to borrow cheaply and invest in assets that offer the highest returns.
Goldman Sachs Group Inc. has benefited more than most. Famed for its trading prowess, the New York investment bank said Thursday that third-quarter earnings swelled to $3.03 billion, more than triple what it made a year ago.
As in past quarters, Goldman leaned heavily on its trading operation — buying and selling stocks, bonds, foreign currencies and commodities like oil and gold — to make money.
“They’ve been on the mark on the trading side,” said Stephen Hagenbuckle, a principle at private equity fund TerraCap Partners.
Goldman’s strong showing came a day after JPMorgan Chase & Co. reported its own big profits — $3.59 billion for the quarter. That was even more impressive because, unlike Goldman, JPMorgan has suffered heavy losses on consumer loans like credit cards and mortgages.
But JPMorgan’s strong investment banking division is “carrying the burden right now,” banking analyst Bert Ely said. “If not for that, they would’ve lost money.”
Goldman’s quick recovery allowed it to repay the $10 billion it received in government bailout money. That freed the company from restrictions on employee pay, which is on track to reach record levels.
The company said it set aside $16.7 billion, or nearly half its net revenue, through the first nine months of the year for compensation, which includes salaries, bonuses and related costs.
Citigroup Inc., meanwhile, offered a grim reminder of just how shaky the economy remains.
Helped by trading gains, Citi reported a $101 million profit in the third quarter. But including the $288 million the bank paid out in preferred stock dividends, plus the deal that gave the government a 34 percent stake in the bank, it lost $3.24 billion.
The bank, one of the hardest hit during the recession, said loan losses during the quarter came to $8 billion. That’s down from nearly $8.4 billion in the second quarter, but a sign that people are still defaulting in large numbers.
Banks have warned that loan losses would continue into next year. Citigroup CEO Vikram Pandit said improving the bad employment picture would be crucial for turning things around.
“Ultimately it’s going to come down to how many jobs are there in the country,” Pandit told analysts. “And that is probably the single best driver of trying to figure out what happens on a macro basis.”
Experts don’t expect the job market to pick up anytime soon, meaning banks could be relying on trading gains for the foreseeable future. While the economy may be out of recession, the unemployment rate isn’t expected to peak until the middle of next year.
For now, most big banks “are holding their breath to see what 2010 will mean for retail profits,” said Brad Hintz, investment banking analyst at Sanford C. Bernstein & Co. “Will unemployment come down? Will the consumer start spending? No one knows.”
AP Business Writers Stephen Bernard in New York and Ieva M. Augstums in Charlotte, N.C. contributed to this report.
| - Stocks post modest gains as rising energy companies offset slide in financials; Dow adds 47
- A day after Dow breaches 10,000, stock wander as earnings from Goldman, Citigroup disappoint
- Lower jobless claims, muted inflation add to hopes for gradual economic recovery
- Lawmakers seek to extend $8,000 tax credit for first-time homebuyers
- Stock slip after Goldman Sachs, Citigroup earnings disappoint a day after Dow tops 10,000
- Stock slide after Goldman Sachs, Citigroup earnings disappoint a day after Dow tops 10,000
- New jobless claims drop unexpectedly to 514,000; inflation remains muted
- Stock futures fall but pull off lows as jobless claims drop; Goldman, Citi numbers disappoint
|
Related News
Banks cut back on Fed emergency lending programs, sign credit stresses easingOctober 15th, 2009 Banks cut back on Fed emergency lending programsWASHINGTON — The Federal Reserve says banks cut back on loans from its emergency borrowing facility and trimmed use of other credit programs set up to ease the financial crisis. Commercial banks averaged $27.4 billion in daily borrowing over the week that ended Wednesday.
Analyst downgrades Heidrick & Struggles on share price getting ahead of the companySeptember 14th, 2009 Analyst downgrades Heidrick & StrugglesHARTFORD, Conn. — Shares of executive search firm Heidrick & Struggles International Inc.
Report: US makes $4 billion in profits from large banks in federal bailoutAugust 31st, 2009 Report: US makes $4 billion from bailout banksWASHINGTON — The U.S. government has hauled in about $4 billion in profits from large banks that have repaid their obligations from last year's federal bailout, The New York Times reported Sunday.
Report: UK mortgage lending 2.3 bln pounds in May, weakest in 8 yearsJune 23rd, 2009 UK May mortgage lending weakest in 8 yearsLONDON — Net mortgage lending in the United Kingdom was 2.3 billion pounds ($3.7 billion) in May, the weakest monthly amount in eight years, the British Bankers Association said Tuesday. The report came as further evidence of sluggish lending activity in the U.K.
State Street Corp. repays $2 billion receives as part of government investment programJune 17th, 2009 State Street repays $2B in TARP fundsNEW YORK — State Street Corp. says it was among the banks to repay $2 billion it received last fall as part of the government's $700 billion bank investment program.
Consumer, commercial lending down in March for banks that took taxpayer moneyJune 1st, 2009 Bailed-out banks lent less money in MarchWASHINGTON — Banks that received taxpayer bailouts had a lower average level of loans outstanding as of the end of March than a month earlier, the Treasury Department reported Monday. Five hundred of the more than 600 banks participating in the $700 billion financial system rescue had an average of $5.24 billion in loans oustanding on March 31, down 0.8 percent from the $5.28 billion average they showed at the end of February.
China says new bank lending in April at $87 billion, down sharply from MarchMay 11th, 2009 China's new bank lending slows in AprilSHANGHAI — Chinese banks issued new loans worth 591.8 billion yuan ($87 billion) in April, less than a third of the previous month's total, the central bank said Monday, as lenders slowed the flow of credit aimed at stimulating the economy. The figure announced by the People's Bank of China was up 27 percent from the same month a year earlier but slightly below forecasts, in recent state media reports, for about 600 billion yuan ($88 billion) in new lending in April.
Banks, investment firms borrow less over past week from Fed's emergency lending programMay 8th, 2009 Banks, investment firms draw less from FedWASHINGTON — The Federal Reserve says banks and investment firms borrowed far less over the past week from its emergency lending program, a hopeful sign some credit stresses are easing. The Fed says commercial banks averaged $40.9 billion in daily borrowing over the past week that ended Wednesday.
Treasury provides $45.5 million to 7 new banks as part of $700 billion financial rescueMay 5th, 2009 Treasury provides $45.5M to 7 banks from bailoutWASHINGTON — The Treasury Department said Tuesday seven more banks have been approved to participate in the government's $700 billion rescue effort, and that a Colorado mortgage company was chosen to participate in a foreclosure mitigation program. The department said the government would purchase a total of $45.5 million in preferred stock in the seven banks, bringing the total supplied through the program to $198.02 billion for more than 500 banks.
Supreme Court to hear arguments over states' right to investigate banksApril 28th, 2009 Court to hear case on power to investigate banksWASHINGTON — States are arguing that they should be able to investigate banks for racial discrimination in lending, despite claims from the federal government that such financial oversight is its exclusive domain. The state of New York, with the backing of the other 49 states, wants the Supreme Court to overturn a federal appeals court decision that blocks states from investigating the lending practice of banks.
Details of government 'stress tests' of 19 big financial companiesApril 24th, 2009 Details of 'stress tests' of financial firmsSome details of the government's stress tests of financial companies with at least $100 billion in assets:
— The 19 companies on the list include an insurer, an auto finance company, lending-only institutions, Wall Street banks and big regional banks. — The tests project how the companies will perform over two years under two scenarios.
Bankers say no to lowering lending ratesApril 8th, 2009 MUMBAI - Concerned over the rising non-performing assets (NPA) and high cost of deposits, India's bankers Wednesday told the Reserve Bank of India (RBI) that there was not much room for lending rates to go down. 'If there is a sharper downturn, it can further impact the asset quality.
Punjab National Bank rules out further cut in interest ratesMarch 27th, 2009 NEW DELHI - The state-owned Punjab National Bank (PNB) feels it would be difficult to lower lending rates any further if the government did not slash interest rates on existing deposits. 'The Reserve Bank of India (RBI) is not reducing interest on savings bank deposits.
Agriculture lending till November crosses Rs.1.36 tnFebruary 15th, 2009 NEW DELHI - Banks have lent Rs.1.36 trillion (Rs.136,586 crore) to the agriculture sector in the first eight months this fiscal as against a full year target of Rs.2.8 trillion. As per the figures released by the government Monday, the commercial banks have lent Rs.96.6 billion, while cooperative banks and regional rural banks have lent Rs.251.2 billion and Rs.148.
Two more banks cut lending ratesJanuary 1st, 2009 NEW DELHI - Two more state-owned banks joined the banking community in cutting lending rates by 50 to 70 basis points. In a regulatory statement, State Bank of Travancore announced Friday that it had revised the benchmark prime lending rate (BPLR) from 13.25 percent to 12.75 percent with effect from Jan 1.
Loading ...