big banks Tag
Wells Fargo’s returns fared somewhat better, which is mostly due to the nature of banking versus more volatile capital markets. Even with this advantage, returns still didn’t live up to those from the year before, which were almost a whole point higher. J.P. Morgan, on the other hand, has hit a plateau at a 10% return rate, casting a more negative shadow on the recent numbers. Conversely, Citigroup looked strong in many areas. They even registered profits through legacy holdings and downsizing, but still only managed a 6.5% return.
Analysts have pinpointed several reasons for this lackluster performance. J.P. Morgan and Citigroup both still face legal challenges in the midst of the global slowdown. Also, interest rates have remained extremely low while demand for loans has remained steady. All this as regulations and the required amounts of capital have gone up.
Some experts cite these facts as proof that this reflects a permanent shift in returns that investors can expect in the future. Of course, banks also have to conform to stress tests performed by the Federal Reserve, which makes them less flexible than firms in other industries. Other macroeconomic factors don’t seem to bode well either, as new mortgages issued at J.P. Morgan, Citigroup and Wells Fargo fell by 14%, 51%, and 40%, respectively.
Trading in certain commodities and currencies has generated some growth. But these mostly signify slightly less anemic banks as opposed to strong ones. Some hold out hope for increased rates in the near future, although many investors have become restless due to the impact of current low rates on net interest margins.
Banks are still finding growth opportunities hard to come by without higher returns. Price-to-book multiples for J.P. Morgan and Citigroup have averaged 1.07 and .076 times, respectively. So, for the time being, the only solution for banks is to rely on cutting costs and looking for gains elsewhere. Despite the initial appearance of the numbers, they really just show that sometimes silver clouds have dark linings.
Under the 2010 Dodd-Frank financial law, the nation’s too-big-to-fail banks are required to run themselves through stress tests designed to ensure that they can weather another financial crisis. They do this by determining if they have sufficient liquid capital to handle some hypothetical worst-case scenarios. The “stress tests” are the Fed’s way of mitigating against another dismal performance by the banking sector in response to a financial calamity.
Citibank, Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and others have been war gaming in preparation for the official Federal Reserve stress-tests. This round of tests is particularly important for Citigroup, which has had two requests for approval to return capital to shareholders rejected by the Fed. While Citigroup met the Fed’s capital requirements this year, the central bank expressed concern about the company’s competence in measuring the risks facing its global operations.
The Fed uses the so-called Tier 1 common capital ratio as its measure of a bank’s ability to buffer itself against another severe economic downturn. Federal regulations require that banks maintain a minimum of 5% common capital. Citibank chose a hypothetical sharp decline in emerging-market currencies as its doomsday scenario. Defaults by its sister banks in the Far East, and weaker housing markets throughout the region, it assumed, would subsequently occur. It predicted that its ratio would fall to 8.4% under that scenario. The bank’s projected ratio was 9.1% under the stress-test it conducted last year.
J.P. Morgan Chase and Morgan Stanley passed their own midterms with solid results. J. P. Morgan Chase predicted its capital levels under a hypothetical economic downturn would be 8.4%, down from 8.5% a year ago. Morgan Stanley projected its ratio would fall to 8.9%, down from a 9.5%. Bank of America Corp. said it would have the same capital level – 8.4%- that it had last year under a stressed scenario, but said it took on tougher hypotheticals on some fronts.
Goldman Sachs and Wells Fargo & Co predicted they would be in a better position to navigate strong financial headwinds than they were. Goldman pegged its estimated ratio at 10.1%, up from 8.9%, and Wells Fargo predicted its ratio would be up from 9.6%to 9.9%. The Federal Reserve’s annual stress-testing process typically concludes sometime in spring.
Bank Profits Up
The federal government wants small business to thrive and grow and hire new employees to reduce the unemployment rate. However, the federal government’s policies have unintended consequences that actually stymie progress for small businesses. Could you imagine the growth rates of small business in the U.S. if the regulations that restrict their growth and ability to borrow were relaxed? There would be one hell of an economic recovery underway!!Visit our website or connect with us on LinkedIn or respond below should you wish to discuss this further.