Saturday , 3 December 2016


Another Big Bank Shock Is Inevitable Unless…

Eight years after the credit crisis, most big American banks and almost27106 all big European banks are relapsing in spite of extraordinary central bank efforts…to liquefy and engineer profits for…[them. However,] as long as…[they] pose colossal risks to the global economy and draw tens of trillions of dollars of central bank spending (which they mostly hoard on their balance sheets to survive and thrive) away from productive economic use, global growth will continue to stagnate, until it contracts dramatically and implodes the big banks all over again.

In the U.S., it’s no surprise that all 6 of its biggest banks managed to beat analysts’ steeply ratcheted-down earnings estimates for the first quarter, providing a positive spin for management but underneath those dubious headline earnings reports, only one had a positive uptick in only one measure of the bank’s health.

  1. JPMorgan
    • reported earnings per share of $1.35 vs. analyst’s average EPS estimate of $1.26
    • but revenue fell from $24.1billion in Q1/2015 to $23.2 billion,
    • net profit fell from $5.9 billion to $5.5 billion,
    • trading revenue fell from $5.8 billion to $5.2 billion and
    • return on equity was 9%.
  2. Bank of America
    • reported earnings per share of $0.21 vs. analyst’s average EPS estimate of $0.20
    • but revenue fell from $20.9 billion in Q1/2015 to $19.5 billion,
    • net profit fell from $3.1 billion to $2.7 billion,
    • trading revenue fell from $3.9 billion to $3.3 billion and
    • return on equity was 4%.
  3. Wells Fargo
    • reported earnings per share of $.99 vs. analyst’s average EPS estimate of $.97
    • revenue rose from $21.3.1billion in Q1/2015 to $22.2 billion
    • but net profit fell from $5.8 billion to $5.5 billion,
    • trading revenue fell from $0.4 billion to $0.2 billion and
    • return on equity was 12%.
  4. Citigroup 
    • reported earnings per share of $1.10 vs. analyst’s average EPS estimate of $1.03
    • but revenue fell from $19.7 billion in Q1/2015 to $17.6 billion,
    • net profit fell from $4.8 billion to $3.5 billion,
    • trading revenue fell from $4.4 billion to $3.8 billion and
    • return on equity was 6%.
  5. Morgan Stanley
    • reported earnings per share of $0.55 vs. analyst’s average EPS estimate of $.46
    • but revenue fell from $9.9 billion in Q1/2015 to $7.8 billion,
    • net profit fell from $2.4 billion to $1.1 billion,
    • trading revenue fell from $4.1 billion to $2.7 billion and
    • return on equity was 6%.
  6. Goldman Sachs
    • reported earnings per share of $2.68 vs. analyst’s average EPS estimate of $2.45
    • but revenue fell from $10.6 billion in Q1/2015 to $6.3 billion,
    • net profit fell from $2.8 billion to $1.1 billion,
    • trading revenue fell from $5.5 billion to $3.4 billion and
    • return on equity was 6%.
While the big numbers were all mostly negative – they don’t give a clear picture of the actual stresses these banks felt from hits to their big revenue-producing areas, the business lines where revenues generally can amount to as much as 60% of earnings. For example:
  1. JPMorgan’s
    • earnings, in spite of beating analysts’ estimates, were actually down 16%.
    • Investment banking revenue fell 24% on lower debt and equity underwriting.
    • Fixed income trading revenue was down 13%.
    • Equity trading revenue was down 5%.
  2. Bank of America’s
    1. earnings were actually down 25% on the quarter.
    2. Investment banking revenue was down 22%.
    3. Fixed income trading revenue was down 17%,
    4. Equity trading revenue was down 11%.
    5. Net interest margin (NIM) dropped 2.6%
    6. and the bank increased its credit loss provision from $9 million to $553 million, mostly based on impaired energy-related loans.
  3. Wells Fargo fared better than all other big banks in the quarter.
    • While Q1 profits were down 5.9%,
    • revenues rose 4.3% and
    • total loans rose 10% on strong consumer demand.
    • NIM fell slightly from 2.95% to 2.9% and…
    • charged off $204 million of energy loans, an increase of 75% from Q4 2015 but Wells comforted investors identifying only 2% of its loan book being exposed to energy.
  4. Citi’s
    • earnings were down 27% but, while loans and deposits grew,
    • investment banking revenue was down 27%.
    • Trading revenue was down 15%, with
    • fixed income trading down 19%.
  5. Morgan Stanley’s
    • earnings were down 53%.
    • Investment banking revenue was down 34%.
    • Fixed income trading revenue was down more than 54%.
    • Equity trading revenue fell 9% and
    • wealth management revenue, typically Morgan Stanley’s strongest division, fell 4%.
  6. Goldman Sach’s
    • net earnings fell a whopping 59.9%.
    • Trading revenue fell 37%,
    • with fixed income, commodities and currencies trading revenue falling 47% and
    • equity trading revenue falling 23%.
    • Advisory fees were down 20%.

Besides the big six U.S. banks, the rest of America’s sizable banks also suffered through the first quarter but American banks haven’t fared nearly as badly as all the big European banks.

Things Across the Pond Are Even Worse

Earnings at big European banks have been dismal. In 2015 the 12 largest European banks earned $0.18 on every $100 of assets, while their American counterparts earned an average of $0.92 on every $100 of assets.
  • In 2015 Credit Suisse, Deutsche Bank, and Royal Bank of Scotland all lost money. Royal Bank of Scotland has lost money every year since 2008.
  • The price of credit default swaps, insurance against their default and bankruptcy, on big European banks in the first quarter of 2016 doubled.
  • According to the IMF, European banks – which lost over $600 billion in the mortgage meltdown of 2008 – are sitting with just over $1 trillion in bad debts on their balance sheets
  • Deutsche Bank’s profits are down 58% and their revenues are down 22%.
  • Barclay’s profits are down 7% and revenue is down 13%.
  • Earnings and revenues at the rest of Europe’s big banks are coming in somewhere between Deutsche Bank’s and Barclays, but are generally terrible.
One reason global growth’s been so anemic is that big banks have been the recipients of central bank largess, which was supposed to trickle down into economies as cheap loan money to spur demand, production, and economic growth but that hasn’t happened to any meaningful degree.
Because the world’s big banks are in constant need of central bank backstopping, and use central bank asset purchasing schemes to enrich themselves instead of increasing the velocity of money throughout the world, economies lack the capital they need to grow.
As long as big banks pose colossal risks to the global economy and draw tens of trillions of dollars of central bank spending (which they mostly hoard on their balance sheets to survive and thrive) away from productive economic use, global growth will continue to stagnate, until it contracts dramatically and implodes the big banks all over again.
In the meantime, big banks are going to pursue earnings growth at all cost. They’re already being accused by some analysts and regulators of end-arounding stricter capital requirements by reclassifying assets as less risky (reducing the amount of reserves and capital they have to set aside) via changes in how they “mark” their assets against internal risk models.
Given their size and the need for economies of scale, big banks will increasingly push the limits of regulations, trading, product development, and leverage to grow their earnings and profits to flush-up bankers’ bonus pools.
The only way to escape the financial terrorism imposed on countries by big banks and their government-sanctioned central bank backers is by breaking them all up so they’re not too big to fail.
Only by breaking the stranglehold central banks and mega-bank oligopolies have on the entire world will credit be freed up and capital markets be free to perform their function of allocating capital and credit.
Disclosure: The original article, by Shah Gilani (wallstreetinsightsandindictments.com), was edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.
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