Large US banks reporting fourth-quarter and full-year 2010 earnings last month revealed widely divergent fortunes.
JPMorgan took star billing, with solid revenues across its divisions, including from client business in investment banking. Rivals, notably Goldman Sachs, reported marked fall-offs in client activity. JPMorgan also boosted its numbers with releases from credit reserves on cards and record revenues in commercial banking.
Wells Fargo enjoyed record quarterly and annual results as strong revenues across many of its 80-odd businesses, declining credit costs and market share gains from the Wachovia acquisition fed through.
Notable underperformers included Citi, where revenues and earnings were hit by weak trading in fixed income and equity, as well as by higher than expected legal expenses. Accounting required it to take losses arising from improvements in its own credit spreads, as the US Treasury sold down its remaining stakes in the bank: a milestone in managements efforts to stabilize the business and stand it back on its own feet.
Bank of America was another that disappointed, after taking a $3 billion hit to settle demands from Fannie Mae and Freddie Mac that it repurchase faulty mortgages sold by its Countrywide unit. It still has to reserve against $10.7 billion of remaining unresolved claims from private-label investors complaining that the bank sold them bad mortgage loans. The final bill for all this is unknown and hard even to quantify within a credible scale of magnitude.
But beneath these surface discrepancies there is much that all banks results have in common. For one, they are once again growing their loan books. And while much of the increase in both consumer and corporate loans at Citi derives from its emerging markets businesses, the more domestically focused US banks are now lending in to economic recovery.
Howard Atkins, chief financial officer at Wells Fargo, told analysts: "We began seeing signs of some loan demand two quarters ago and in the fourth quarter that translated into an increase in loan outstandings, which were up 2% in total and up 6% linked-quarter annualized in portfolios other than the nonstrategic loans we were running off."
At Bank of America, "consumer loans increased due to retained mortgage originations. Commercial loan demand stabilized in the quarter," reported CFO Charles Noski. "And average commercial loans, excluding real estate, were up 1% from the prior quarter."
Doug Braunstein, chief financial officer of JPMorgan, reported increased lending to large wholesale customers of the investment bank. "Thats up 6% quarter on quarter and were beginning to see that new business activity build, and as a result of that, some increasing demand in loans as the market for credit and the economy generally picks up."
Whats more, the growth in commercial bank lending to middle-market companies that took off in the third quarter of 2010 continued in to the final three months of last year. Braunstein said: "Balances are up 11% year on year and some of that is driven by demand, some by new client growth. For the year, we added 1,600 clients approximately in the middle market, 400 new clients in the quarter."
For US critics that have demanded that the US banks support recovery with loans to repay taxpayers that bailed them out in 2008, this looks like a reasonable response. It coincides with an uptick in the US economy starting last year. Business sentiment, consumption indicators and retail sales (including cars) turned positive late last year, although this might be the least that should be expected amid prolonged low policy rates and given the renewal of tax cuts.
Charles Dumas, chief economist at Lombard Street Research, said last month: "US retail sales indicate continued growth of real consumption at about a 3% annual rate despite the savings rate being down from 6.3% to 5.3% over the latest five months."
He adds: "Despite higher manufacturing output, inventories have been brought back into line versus sales, and real GDP growth of 2.5% to 3% during 2011 is likely."
Economists at bank lobby group the Institute of International Finance are even more optimistic. "With fiscal policy remaining expansionary in 2011, signs that the labour market recovery is slowly gathering pace and gains in equity markets boosting wealth, we think the conditions are in place for consumption growth to surprise on the upside in 2011."
Surprisingly, it is left to bank executives themselves, at banks reporting both weak results and strong, to inject a note of caution. Braunstein at JPMorgan offers a word of warning to those tempted to read too much into reviving corporate loan demand. "Utilization rates across the commercial bank continue to remain flat through the last quarter of the year in the low 30s."
Citi chief executive Vikram Pandit also senses some market participants taking too much for granted. "The effects of the financial crisis are still working their way through the system, and I think that macro trends will dominate micro trends, especially for the next few quarters. And although there are positive signs in the US economy, the housing market has yet to recover, job creation has been weak and internationally excessive government leverage is still hampering recovery in the eurozone."
Jamie Dimon, JPMorgan: the fallout from badly written and documented mortgages will be around for years
This creeping note of pessimism among senior bank executives perhaps arises in reaction to the pressure they feel from shareholders who believe that banks have become overcapitalized and underleveraged. The banks are suddenly all finding themselves urged to lay out their plans to return capital to shareholders through resumed dividend payouts or stock buybacks or both, even before the banks have fully met Basle III requirements and before regulators have decided on possible capital surcharges for large and systemically important banks.
In addition, bank executives know that the wreckage of the financial crisis will be spreading shrapnel wounds for some time yet, requiring them to pay heightened legal costs and perhaps substantial reimbursements to clients.
Jamie Dimon, chief executive of JPMorgan, questioned about settlements to buyers of badly underwritten and documented mortgages, says that while the issue will not be a "terrible one" for JPMorgan, "its going to go on for years. Well be talking about this every quarter for the next three years."
In the meantime, while US banks have benefited from reduced bad-debt charge-offs and increased loan volumes and margins during the recovery over the past 20 months, the biggest question of all is how much longer this recovery can continue to be sustained by loose monetary and fiscal policy.
"A lot of attention is focused on the credit fundamentals and debt sustainability of European sovereigns," one banker tells Euromoney. "But arguably the numbers are worse for the US, as well as for Japan, and my question is when, perhaps in the second half of 2011, will concern shift to the US?"