Bank profits not as impressive as they seem - By Stephen Bernard and Ieva M. Augstums 07/17/09

Bank profits not as impressive as they seem - By Stephen Bernard and Ieva M. Augstums 07/17/09

Bank profits not as impressive as they seem
Banks turn in hefty profits, but industry still has big problems
By Stephen Bernard and Ieva M. Augstums, AP Business Writers
On Friday July 17, 2009, 11:15 pm EDT

The big banks are making big money again, but they won't be back to health as long as they have to deal with a recession and customers defaulting on mortgages and credit cards.

The impressive numbers included a $3 billion second-quarter profit announced Friday by Citigroup and $2.4 billion for Bank of America. They followed similarly robust earnings for Goldman Sachs and JPMorgan Chase.

That the banks managed to turn a profit at all is remarkable. Just 10 months ago, many of them looked to be on the verge of collapse. The stock market staged a huge rally this week, driven by the signs of health in banking.

But Bank of America CEO Ken Lewis had some sobering words during a conference call with Wall Street analysts after his company's results were released Friday: "Profitability in the second half of the year will be much tougher than the first half."

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading -- not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage.

Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do.

Bank of America, JPMorgan Chase and Citigroup Inc. all reported they lost more money on loans during the second quarter. Bank of America alone set aside $13.4 billion to cover loan losses. But the banks also saw signs that loan delinquencies were starting to stabilize.

Celent analyst Isabel Schauerte said Bank of America's earnings tell the story of the financial industry.

"B of A's results are the bellwether of where Main Street is headed. Measured by credit losses, a moderation of default rates is not in sight," Schauerte said. "For the investment banking business of B of A, in contrast, the worst days seem to have passed."

President Barack Obama's top economic adviser said the signs of improvement displayed by the banks would not have been possible without government infusions, guarantees and other programs provided by the government.

"There is no financial institution that would be reporting the kind of positive results that we have seen in the last quarter but for the extraordinary public support provided by the government," said Lawrence Summers, the director of the White House's National Economic Council.

The profits announced this week raise more questions about when banks will be able to repay their bailout money. Goldman Sachs and JPMorgan Chase have already repaid their loans. Others, like Bank of America and Citigroup, have not.

"Moving forward, companies that are solvent and performing should be held to the promise to repay the taxpayers with interest," said Rep. Darrell Issa of California, the top Republican on the House Oversight and Government Reform Committee, which is convening a hearing next week on bailout oversight.

The banks that reported earnings this week cited similar trends:

-- Mortgages: Bank of America's second-quarter revenue was bolstered by a spike in mortgage refinancings as interest rates tumbled early in the quarter. But rates have been climbing lately, and analysts expect that surge in refinancings to taper off. And more people are defaulting on mortgages.

-- Credit cards: Credit card losses tend to track the unemployment rate, and banks are expected to keep losing money on credit cards as more people lose their jobs. JPMorgan Chase, Citi and Bank of America all have huge credit card operations.

-- Investment banking: By far the quickest recovery in the banking business has come in the investment banking sector, helping Goldman Sachs earn $2.7 billion in the second quarter. Some of the rebound has come from the big stock market rally this spring. Companies also did well because there's less competition since Lehman Brothers and Bear Stearns went under.

Analysts say that besides the problems with loans, bank earnings may suffer because the country has less of an appetite for debt.

-- Commercial real estate: While home foreclosures are increasing, the commercial real estate market is expected to keep causing loan losses for banks. Rising store and office vacancies are cutting into landlords' and developers' cash flow, and leading them to default on their mortgages.

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Banks

Thanks again Joe for these important updates. Too many eggs in one basket! Associating with smaller banks I believe will help the economy. Americans are learning how to live today from need. This is just something we have to get thru for the our families future. Things were totally out of control. I am greatful to be in this place and time. I believe we have the strength to recover from this devastation our country faces! Continued success............Lubertha

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"GOD IS STILL IN CHARGE, HE IS THE AIR WE BREATHE"


Lubertha,

Thanks for your comments and insight. It is true tha the economy is so different today theen 2 years ago. Most families are doing without and making tougher choices when shopping. The credit crunch is holding the econom back and the sooner it gets back on track the better for the economy. Continued success. Believe and Achieve! Smiling - Joe

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Great article Joe! This may

Great article Joe! This may just be something I need to do some research on, but where can I find websites of local real estate articles and stories?

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Success and Nothing Less!


lkward13,

Thanks for the comments. You may want to start with your local library and look through local newspapers in your area. Some smaller towns even have a little local nespaper that they circulate by delivering door to door. Another idea may be to contact your state branch of the association of realtors and they can advise you to publications or articles about your area. Investment clubs often issue newsletters as well that discuss very relevant topics. Good luck with REI. Believe and Achieve! Smiling - Joe

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Lubertha

I agree that the order of the day is to do business with the small banks to boost this economy back in shape. We live and we learn. This is a totally different time in history where need supersede wants. God Bless.

Sandra

__________________

"You can never get to the top, if you are not willing to climb. Do not look at the difficulty of the climb, only anticipate the view from the top."
"Can't even walk without you holding my hand." (Song)
"Is anything too hard for the Lord ..." Genesis 19:14
"In all things, wait on the Lord."
"Think not of your own deliverance, but trust in God who will give in abundance."
"When you are down to nothing, God is up to something." Unknown
"Our lives begin to end, the day we become silent about those things that really matters." Dr. Martin Luther King Jr.


Joe

I just enjoyed reading this article. It tells the whole story of an incident that was destined to happen. At the rate the economy was going, there will have never been so much opportunities for the real estate investor as it is now. This is our time to shine and acquire wealth. Thanks so much for sharing. God Bless.

Sandra

__________________

"You can never get to the top, if you are not willing to climb. Do not look at the difficulty of the climb, only anticipate the view from the top."
"Can't even walk without you holding my hand." (Song)
"Is anything too hard for the Lord ..." Genesis 19:14
"In all things, wait on the Lord."
"Think not of your own deliverance, but trust in God who will give in abundance."
"When you are down to nothing, God is up to something." Unknown
"Our lives begin to end, the day we become silent about those things that really matters." Dr. Martin Luther King Jr.


Sandra,

Thanks for the insight and the comments. It is true that now is the time to prepare ourselves and take action for the bet opportunities in real estate. The more we learn and undertsand the market, financing and motivation of the sellers and banks, the easier the process should become. Continued success. Believe and Achieve! Smiling - Joe

__________________

YOU TUBE CHANNEL - Follow me on my You Tube Channel at Joe Jurek Real Estate Investing Adventures
https://www.youtube.com/channel/UCiko62V79zLKX_owbirAYNA

TWITTER - Follow me on Twitter at Joe Jurek CPA
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