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Banks Still Aren't Lending; Credit Crunch Continues
From The Daily Capitalist
Loans Fall; Credit Continues to Contract
The megabanks have settled back to earth as they all reported very modest Q2 gains as compared to Q1. Goldman Sachs reported that their profit declined 82% in Q2. Previously commercial banks JP Morgan Chase, Citigroup, and BofA all reported declines.
The headline for the group is Goldman because of their (former) stellar reputation. They had $1.15 billion of settlements related to their SEC fraud allegation settlement of $550 million and a tax settlement with the UK regarding the taxation of bonuses. If you strip out the settlements they would have had EPS of $2.75 vs. $4.93. What was really interesting was that their mainline business, trading operations, was off 39%; apparently they bet wrong on market volatility because they didn't see the euro crisis coming:
Mr. Viniar [CFO] said the firm was caught off guard by the market's volatility. Goldman's equity derivatives were on the wrong side of bets that stock-market volatility would ease during a quarter when equities had wild swings.
"We didn't hedge it fast enough, let's put it that way," he said. "We were reducing position size and hedging things, but things spiked really dramatically really fast."
I wonder how they measure risk and I wonder if their risk models have changed, post-crash.
Enough of Goldman, what is significant in looking at the economy is that the commercial banks were down. Almost every one of them.
Let's start with the better news. This morning, Wells Fargo reported earnings were up 20% QoQ, and up 3% YoY. They did well in most areas and reported overall gains in lending. But, digging a bit deeper, you will see that total loans declined 7.5% YoY and 3.2% from Q1. They said they saw improving loan conditions in the last 30 days and their charge offs are declining, a 16% QoQ improvement. "On the commercial side, for
the first time this year, we saw an increase in lending activity and line usage."
Citi reported that their profit fell 37% YoY. They eked out 9¢ per share earnings.
Weak investment-banking results, anemic loan demand, and a lack of progress in U.S. consumer-banking businesses hampered results, but Citi made progress in shrinking its unwanted assets and its troubled loans continued to subside.
"I'm very pleased we have produced solid operating results for the second consecutive quarter," Chief Executive Vikram Pandit said during a conference call with investors. ...
Citi's provision to cover trouble loans fell 47%, to $6.7 billion, and the bank took $1.5 billion out of its reserve for loans unlikely to be paid back. Net credit losses fell to $7.96 billion from $11.47 billion.
"The area that is most fragile" in terms of loan losses remains the U.S.; about 80% of consumer credit losses come from credit cards and mortgages in the U.S., Mr. Gerspach said.
Another Citi fact: The amount of REO properties held reached $1.4 billion, an 81% increase from the same time last year.
You should be aware that you are still a shareholder of Citigroup, the only major bank which hasn't fully repaid their government loans. That's what really irks me about Mr. Pandit when he announced that he was very pleased. This is the guy that sold his Old Lane hedge fund to Citi for $800 million in 2007, then became CEO of Citi, and then his fund ended up being worthless. He should give it all back. Citi received $45 billion in loans through TARP, repaid $20 billion last year, and was allowed to convert the rest of the debt to stock. I hope the government loses money on the deal as a lesson to not bail these companies out, but, just my luck, they'll probably make money on the deal.
Bank of America's net dropped 3%, but as America's largest lender, that's significant. Their revenues shrank 8.8% over Q1 and 11% YoY.
Bank of America's loan portfolio shrank 2.5% from the first quarter and was relatively unchanged from a year earlier, at $967.1 billion.[CEO] Moynihan isolated middle-market commercial clients as a segment that had "done a great job getting delevered and in very good shape" financially.
BofA CFO Noski said: "'They're [businesses] ready to go,' he said, if uncertainty in the U.S. and Europe dissipates." He wouldn't make a very good salesman. As the old saying goes, "Hope is not a strategy."
The regional banks are worse. Two regional banks, Zions and Marshall & Ilsley, reported losses based on their portfolio of bad commercial real estate loans:
Zions reported a loss of $135 million after the market closed Monday. The Salt Lake City-based lender's $1.96 billion in nonperforming loans—loans at high risk of becoming uncollectable—fell modestly over the first quarter, but still remain higher than three quarters ago. The bank's core revenue also shrunk as total loans fell for the fourth straight quarter.
M&I, based in Milwaukee, reported a net loss of $174 million and said its troubled loans continued to improved, a key issue for a bank that made big bets on construction loans and has now reported a loss in eight of the nine last quarters. ... Wisconsin-based M&I's $2.2 billion in nonperforming loans fell for the fourth straight quarter, and have fallen a total of 7% since the first quarter of 2009.
To put this in perspective, a lot of bank earnings seem to "gamed" such as reducing loan loss reserves which result in gains, sales of key assets, and problem loan write-ups. But the key thing in all of these reports is that their core business, U.S. business and consumer lending, is down because loan demand is down. All of these factors support the credit contraction charts that show consumers and businesses deleveraging, increasing savings, and are waiting for positive signs of a recovery before they resume borrowing.
These are the most important statistics in the economy right now. We ask why we have a credit crunch, why banks aren't lending, why borrowers aren't borrowing, and why money supply continues to decline. The short answer is mostly, commercial real estate loans which hold back every bank as these loans continue to go bad while they watch the commercial real estate market decline. It won't get better until banks are held to higher standard of capital and leverage which means more banks will and need to fail.
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I wish there were a way to have an anti-junk vote for really good comments. Such as for walkure's mafia comment. In my naive days, I used to think the anti-Fed movement was loony-tunes--not that I thought about it at all. Live and learn . . .
What banker/bankster in his/her right mind would do much lending now? Just eat the slops at the Fed trough.
The banks are lending, just not to the people that need it. Back in April, I had two unsolicited (and uncoordinated) contacts from representatives of my mortgage lender. Both were pitching the same deal - a reduction in my fixed rate by 0.5% with lender credits exceeding closing costs. They wrote me a check for $1,090 when the loan closed. I tried to do the same on my vacation property but they couldn't - it wasn't a Fannie Mae or Freddie Mac loan.
The Making Home Affordable Program is being used to retain credit worthy customers and fluff the numbers for the authorities. Meanwhile, my brother-in-law can't get a return phone call on his mortgage (and 2nd) as he sits idled in residential construction.
A problem more stimulus & printed money not only WON'T fix but make worse.
Go ahead & make oil $100, a Ford Focus 40K because of metal prices... kill demand & kill jobs.
Exactly. All they've managed to do so far is to reflate the prices of every asset *except* the one they intended - houses.
Reflation without concomitant wage gains is a recipe for unemployment.
No Problem...go to ze godfather..
"The mafia has cranked up money laundering activities in Italy after the credit crunch prompted banks to stop lending, leaving a funding gap that criminal capital has filled, according to the Bank of Italy."
http://www.bloomberg.com/news/2010-07-21/bank-of-italy-says-financial-crisis-fosters-mafia-driven-money-laundering.html
There is only mafia, either legalized or the other kind.
Both are in the business to make loans and make a profit by doing so.
Of course if the government isn't in on the cut, they declare it illegal.
Whatever. Making private loans that yield more than the 30 yr t-bill isn't illegal.
DOW chart update :
http://stockmarket618.wordpress.com
First time posting, and not sure if I can provide any further analysis other that I work in Finance @ one of the big four banks mentioned above (not gs, so go easy w/ the pitchforks). It IS becoming more competitive between the big banks for loans and the margins are decreasing. Q3+Q4 2009 actually benefited many of the banks due to lack of competitiveness, increasing margins. Yet, H1 2010 there was increased competition between all the big players so a decrease in revenue, and the bottom line. Bp spreads were tighter.
Anyway, good analysis, and yes, banks might be in a bit of squeeze soon. Just don't short my bank...cause i'm already doing that.
Arrinex:
Are these loans for Fortune 1000 type companies? Or are they at the "retail" level-- i.e., the half of the economy that are small businesses.
Great input. Thanks.
Mostly Fortune 1000 companies (Ie. Sears, Best Buy, etc). Small businesses not so much.
I will say that I believe that the outlook for next year does not look good as a lot of the big boost this year and H2 2009 was from a one time boost. Prop trading actually was one of the largest drivers in profitability. Were shrinking a lot in terms of branches and dealing with customers on a day to day basis (small bus).
Most interesting thing today for me was listening senior management tell me how TARP was not beneficial to the banks I work at and individuals at the bank would receive calls all the time from Gov employees (ie senators) who would say "Don't close this xyz business, we need it to be open" even though the bank wanted to close on them since they defaulted on their pyaments and were insolvent.
Arrinex:
Are you saying that the bank received political pressure to not proceed on defaulted borrower? Would you please contact me privately: see my email address here.
welcome and .. thanks for the humor! much appreciated.
Attempting to turn people into debt-slaves is tricky business. A couple of more 75 year cycles and they'll have it down pat.
I'll wager that all the money you want to borrow is out there.
Creditworthy folks don't want it and the uncreditworthy can't get it -- at amortizable rates.
Problem is, nobody wants it. For what?
Companies sitting on record amounts of cash? Why borrow?
Exactly. Why lend when you can pump & squeeze the market with all that borrowed capital. The worst that can happen is that you lose money that isn't yours in the first place, and go out of business, which would have happened anyway once you take on all those CDS losses.
Even if FED lowers reserves to 0% banks will still not lend.
First, they have no one else to lend to, as credit worthy borrowers are at all time lows.
Second, they would rather make no money on reserves, than to lose it by lending it out to another round of defaults.
Actually the FED is paying them interest for "excess" reserves they have "on deposit" at the Fed. So Ben pushes a button and the reserves appear out of nowhere. Then Ben has to push another button to pay them interest on the reserves which came from nowhere.
Maybe it's a rebate, because Ben doesn't have to fire up the ink, paper, and presses.
I took a quick search at the FED site, and couldn't find the notification on the interest. But I definitely remember gagging over the tortured logic with which the interest payment was grounded.
Ben and Timmeh are so obsessed with the banks earning their way back to reality, they don't even attempt a facade anymore.
They must have soiled themselves when they saw how shitty the Big Guys did this Q. Not to mention the Regionals are starting to show deterioration due to the CRE loans.
It just keeps getting better and better.
Pike:
This just talk by the Fed at this point, I believe. It's one of their exit strategies.
Econophile:
Thanks for the nod, always enjoy/appreciate your posts. If you are referring to the interest payment, here's the Fed's post as of 10/06/08. It came through, as an aside, with the setup of all of the dirty-laundry vehicles.
http://www.federalreserve.gov/monetarypolicy/20081006a.htm
As he took junk collateral for repos and completed sales for QE I, he loaded their accounts well beyond their Core Tier I, and he's paying them an extra interest on that "excess".
It's tied to a comp on a rate which I don't remember, but estimates I saw were in the $245MM range for '09. A spec of dust, but all the more irritating.
Any recent reference to it, has been Ben cutting the interest payment, to push through some lending.
If Ben offers his right hand to you, be sure not to lose track of the left one.
How can banks make money going forward with loan portfolios shrinking?
Shoot, as long as the banks can monkey with loss reserves and keep the fair value boogeyman away, the "moneymaking" numbers will be what they want them to be. Start with the desired result and work backwards. Same as it ever was.
The old fashioned way, of course. From the American Taxpayer. This should be obvious by now.
No. The old fashioned way was expanding lending.
Living on spread is new. Yes it seems to work today but it won't work for much longer.
Apparently the Fed's plan is to keep wholesale rates near zero and T-bill-over-wholesale spreads wide until banks start expanding lending again.
Doesn't seem to bother them that interest on reserves and wide T-bill-over-wholesale spreads are discouraging lending.