Bank profits rise, but revenues sag
TEXT OF STORY
Kai Ryssdal: There was another batch of banking profits out today, and with those reports, fresh signs of an improving economy. Both Wells Fargo and U.S. Bancorp posted higher fourth-quarter earnings this morning. Thanks, in part, to making more money off loans.
But the results, it should be said, were also a bit skewed. Now that the economy’s generally on the rise, growing however slowly, banks aren’t setting aside as much for losses as they used to just a couple of years ago. And while that helps the bottom line — profits — it doesn’t hide the fact that banks aren’t bringing in as much money as they did before the recession.
Our senior business correspondent Bob Moon reports.
Bob Moon: Banks are facing a challenging new world, compared to the lofty numbers they were able to post before — let’s just say, before reality set in.
Eric Oja is a banking industry analyst at S&P Securities.
Eric Oja: Revenues a few years ago were probably artificially inflated, so it’s unfair, I think, to compare revenues now with revenues then.
Moon: Is that revenue ever going to come back?
Oja: Probably not.
Which is why today’s headline — that Wells Fargo posted a record profit — doesn’t tell the whole story.
Oja: The quality of earnings is not at all high.
That’s another way of saying: The banks can’t keep this up if their traditional cash cows don’t start coming home. Businesses remain reluctant to tap their bank credit lines, so loan fees and interest income are still lagging. And Celent analyst Bart Narter says retail banks face more challenges.
Bart Narter: You have a whole bunch of new regulations that reduce revenue to banks.
For example, your bank used to be able to charge you $35 for that latte you mistakenly put on your debit card.
Narter: You go into overdraft, you pay $5 for the latte and $30 for the overdraft charge.
But not since banks were forced to get your permission to apply so-called overdraft protection. Other fees have been limited by regulators, too. So Narter says look for banks to focus on changing your behavior — say, steering you toward an ATM rather than taking up the time of a teller in person.
Narter: Many banks are concluding that they aren’t going to get the money back, and to increase profit, they’re going to have to reduce costs or become more efficient.
There is an old-fashioned way of increasing a bank’s cash flow. But like everything else about this slow-motion recovery, that’s going to take time.
Narter: Fundamentally, to have a healthy banking industry, you need to have a healthy economy.
Narter says when the economy picks up — when people have jobs and can get mortgages — that will start generating more revenue for the banks.
In Los Angeles, I’m Bob Moon for Marketplace.
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