After rough quarter, some ask if Wall Street banks are too big
Wall Street banks reported such bad quarterly results that it has raised fresh questions in the eyes of investors if they have gotten too large in recent years to be operated profitably.
Citigroup (C), Bank of America (BAC) and JPMorgan (JPM) all blamed a slowdown in trading revenue for their failure to meet analysts' expectations. Mammoth legal costs from a variety of legal investigations haven't helped either. Their shares, which have underperformed the broader market over the past year, not surprisingly are getting pummeled in trading today.
Wells Fargo (WFC) reported an in-line quarter, though its business model is more dependent on mortgages than its competitors. Its stock dropped as well after posting earlier gains.
One business for big banks that has shown particular weakness in recent months is fixed income. Citi today reported a 16 percent decline in fixed-income revenue on a year-over-year basis, to $1.99 billion. Bank of America's fixed-income trading business saw a 21 percent decline in revenue, while JPMorgan, which issued results yesterday, saw a 14 percent decline.
The results were worse than analysts had expected. Companies blamed their struggles on a difficult credit environment spurred by heightened volatility.
Banks are also making less from trading securities. Citigroup reported a 2.7 percent decline in revenue from trading equities, while Bank of America reported a modest increase excluding one-time valuation adjustments. JPMorgan, the largest bank by assets, reported a 25 percent gain.
"The question [of breaking up the banks] remains on the table after the results that we have seen," said Mike Mayo, a veteran banking analyst with CLSA, who is often critical of the industry, in an interview. "That's getting increasingly asked by investors."
Speaking to Wall Street analysts at yesterday' s earnings conference call, JPMorgan CEO Jamie Dimon argued that breaking up his bank, which has a market capitalization of about $210 billion, makes no sense.
"The synergies are huge, both expense and revenue synergies, et cetera," he said. "And some, not all, would disappear under various schematics of a breakup or something like that."
Legal fees also continue to be an issue. Citigroup set aside $2.85 billion in the quarter to resolve costs associated with investigations into money laundering and allegations of rigging interest rate benchmarks and currencies. Bank of America's legal costs tied to the role of its Countrywide business are largely behind it, though it has resulted in more than $70 billion in legal settlements. Meanwhile, legal expenses at JPMorgan were $990 million, which CEO Jamie Dimon cited as evidence that the bank was under "assault" by regulators.
Meanwhile, activists are raising concerns about efforts by the financial services industry to water down Dodd-Frank, a controversial law passed in 2010 designed to prevent a situation like the recent economic slowdown from reoccurring. No high-ranking bank executives have been charged criminally for their roles in the worst economic slowdown since the Great Depression and some experts doubt that will ever happen. Financial institutions, though, have paid billions in civil penalties.
"The reason why we haven't seen any serious convictions of any of the big banks is that they are so adept at infiltrating the regulators that are supposed to hold them accountable," said Jesse Bragg, a spokesman for the Corporate Accountability Project, a non-profit that's often critical of the financial services industry. "Certainly, there needs to be more transparency with these big banks. We need to break them up. That will solve the transparency problem and keep us from going down the road that the banks are very eager to get back on."