Money Matters - Simplified

3 big banks' Q2 results stir up growth concerns

Government’s move to overhaul Wall Street will cost Bank of America billions of dollars. The new rules could wipe 10 billion dollars off the intangible value of the firm and would hit profit in its bank-card business.

The second-quarter results announced by the three biggest U.S. banks disappoint.

While net charge-offs of loans declined, revenues at behemoths, Bank of America (BAC.N), Citigroup Inc. (C.N), and J.P. Morgan Chase (JPM.N) slumped.

On the positive side credit costs fell, but on the flip side loan books shriveled as well.

The net interest margins, the difference between what a bank earns compared to what it pays on borrowed funds, plunged at all three banks as compared to the previous quarter.

"The market is shifting from looking for credit-quality improvement to wanting more growth," Jason Goldberg, a bank analyst at Barclays Capital said on why the experts were not happy with the ‘mixed bag’ results.

Effect of European crisis, oil spill
In nutshell, the quarter left the once-vaunted profit engines of Wall Street sputtering. The European sovereign debt crisis and the BP oil spill in the Gulf of Mexico are being touted as reasons for the dismal performance.

"It's a bad quarter. When we experienced the flash crash, it put a lot of people on the sidelines (and) hurt investor confidence," said William Smith, chief executive officer of Smith Asset Management.

Bank of America’s investment banking business quarterly revenue fell nearly 40 percent, while the comparable revenue at JPMorgan Chase and Citigroup fell 24 and 26 percent respectively.

Overall, markets were untrustworthy and tricky to trade in the second quarter. The flash crash on May 6 sparked off a theatrical stock market crash and left banks tottering from losses on derivatives.

Banks, which sell options and hedge the positions by buying shares, incurred loss on their options books as well as their hedges.

"It's a bad quarter. When we experienced the flash crash, it put a lot of people on the sidelines (and) hurt investor confidence," said William Smith, chief executive officer of Smith Asset Management.

Impact of new regulations
Banks which have a pretty large exposure in the U.S. consumer market will henceforth incur larger-than-expected costs due to financial regulation.

Bank of America disclosed that new rules that come into effect due to the financial industry overhaul, especially the curbs on debit-card fees, may trigger a $10 billion charge at the largest U.S. bank.

“We are seeing brutal honesty and transparency” from Bank of America, “It’s going to have a big impact on all of the big banks,” said Nancy Bush, an independent bank analyst.

While the stringent government measures would take a toll on the Bank of America because of its dominance in the U.S market, Citigroup may be best positioned in this regard.

More than half of the New York City based bank's consumer-lending revenue is generated in markets outside the United States.

“Banks are going to need to replace a significant amount of lost revenues and look for recurring revenue streams that can basically provide new growth,” noted Terry Moore, managing director of Accenture’s North American banking industry program.