Shrinking bank revenue signals growth worries

NEW YORK: Shrinking revenue at US banks, led by Goldman Sachs Group and Citigroup, may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression .
After the six largest US banks posted record revenue in 2009, combined net revenue fell by an average of 8% in the third quarter from a year earlier and 16.3% over the last two quarters, according to data compiled by Bloomberg.
Revenue so far this year is down by 4.1%, driven by declines in everything from trading at Goldman Sachs to home lending at Bank of America. New laws restricting account and credit-card fees, as well as derivatives and capital rules, are also squeezing lenders.

Next year will kick off a decade that will bring the “worst revenue growth” for US banks in 80 years, according to Mike Mayo, an analyst at Credit Agricole Securities in New York. Net revenue at US commercial lenders has expanded at a slower pace in each of the last three decades , falling to 6% in the last decade from 12% in the 1970s, says Federal Deposit Insurance data.

“Revenues aren’t just weak for this quarter, or even for this upcoming year, but for the entire upcoming decade,” said Mayo, a former Federal Reserve analyst, who has more than 20 years of industry experience . “The speed limit’s been lowered for how fast banks can drive earnings.”

The trend over the last two quarters is hitting almost every line of income statements and is spread across the sector, affecting investment banks, consumer banks and commercial lenders. It’s eating away at profits, depressing stock prices and threatening bonuses and new hiring.

BofA, JPMorgan

The 17.6% drop in net revenue since March 31 at Charlotte, North Carolina-based Bank of America, the largest US bank by assets, came mostly from its mortgage-lending and credit-card businesses. The company reported a $7.3 billion loss in the third quarter after taking a $10.4 billion goodwill writedown against new debit-card laws. JPMorgan Chase & Co, where revenue dropped 13.9% over the same time frame, has been hurt by bad credit-card loans. Revenue from credit cards at the New York-based lender, the second-largest in the US, fell more than 17.6% in the third quarter from a year earlier.

The bank’s revenue is also suffering , along with the rest of the industry , from new restrictions on the fees it can charge for credit cards, checking accounts and other consumer services. CEO Jamie Dimon, 54, told analysts on October 14 that the bank will lose about $750 million in profit as a result. He also said new derivatives rules will cost $1 billion in lost revenue.

Trading Revenue

Wells Fargo & Co’s decline of 2.7% since the first quarter has come from its community-banking operations. New limits on overdraft fees trimmed revenue at the San Francisco-based lender by $380 million in the third quarter, Chief Financial Officer Howard Atkins told analysts on an October 20 conference call.

Goldman Sachs and Citigroup, whose revenue fell 30% and 18% over the last two quarters, have been hampered by lower trading results . The two firms had the biggest drop of the six banks so far this year. At Morgan Stanley, a fall in fixedincome and equity trading drove revenue down 25% over the six months. Goldman Sachs and Morgan Stanley posted declines in fixed-income trading revenue of more than 37% from a year earlier while Citigroup’s i- banking revenue was down by 20%.

‘New Normal’

Lower credit costs and a less gloomy housing outlook allowed lenders to draw down reserves and set aside fewer provisions against consumer loan losses. That helped them to remain profitable. Net income for the first nine months was $39.6 billion for the six banks, compared with $39.5 billion for the same period last year. Still, some analysts questioned the growth prospects of an industry that made up as much as 20% of the profit from Standard & Poor’s 500 Index companies before the financial crisis.


“That five-or six-year period during the boom, that was just purchase activity created by credit,” said Christopher Whalen, a former Federal Reserve Bank of New York analyst and co-founder of Institutional Risk Analytics in Torrance, California. “The ‘new normal’ terminology , the cliché we all hate, is absolutely true. When you’ve withdrawn all of this credit from the economy, you’re also taking a component of revenue out.” “We’ll be lucky” if revenue growth for US banks is flat this decade , Whalen said.

40-Year Trend

Financial companies have trailed the broader equity market this year. The S&P 500 Financials Index is up 1%, while the overall S&P 500 Index has climbed 6.3%. Bank of America and Morgan Stanley have each fallen more than 17%, while Citigroup had the only increase among the biggest six, jumping 27%.

The six largest lenders are trading at an average of 0.9 times their book value, less than half the average level over the last 10 years. Bank of America’s market value is about 53% of its book value, while Wells Fargo is trading at 1.2 times its book value.

Declining revenue growth rates for banks is a 40-year trend, according to FDIC data. US banks had compound annual revenue growth of 12% from 1970 through 1979, about 10% during the 1980s, 8% in the 1990s and 6% over the most recent decade.

‘Not Your Friend’

“When it comes to decade-long revenue growth for banks, the trend is not your friend,” Mayo said. “Basic traditional banking is likely to remain weak. It’s a slower-growing economy, and banks can’t or shouldn’t try to overcome headwind by reaching for inappropriate risky growth.”