Just eight months ago, many of the nation's largest commercial banks appeared on the brink of financial ruin.
Skyrocketing loan losses had drained much of their capital and wiped away hundreds of billions of dollars in shareholder wealth. There was widespread talk of the federal government "nationalizing" a few of the nation's largest financial institutions and whipping them into shape.
Now, the picture is decidedly less bleak -- for the banks, at least. Four of the nation's six largest banks, including Wells Fargo & Co. and U.S. Bancorp, institutions once viewed by some as too weak to survive without taxpayer support, are churning out bigger profits as evidenced in financials released Wednesday. Balance sheets have been aided by ultra-low interest rates and improvements in some areas of the economy, and many banks' share prices have tripled or quadrupled since the market hit bottom in early March.
But while banks are the arteries that pump life into the economy, their return to profitability doesn't necessarily portend a quick recovery from the severe downturn that began two years ago, say industry experts. That's because much of banks' recent gains have come as the result of cleaning house rather than a pickup in lending activity. Large banks have wiped billions of dollars in unwanted loans off their books, lowered interest rates on deposit accounts and raised rates on credit cards and many commercial loans.
Indeed, despite the stronger profits, total lending by U.S. banks has declined for five consecutive quarters, according to SNL Financial. Millions of consumers continue to default on their credit cards, home equity lines of credit and mortgages.
"We should be leaping for joy that the banks are still here and that we all, 100 percent of us, didn't end up on the bread line," said Tim Nantell, a finance professor at the University of Minnesota. "But it's not a good thing [for consumers] that your interest rates on loans go up and your deposit rates go down. Many of these profits that are reported ... don't necessarily bode well for consumers."
Wells Fargo, Minnesota's largest bank by deposits, reported a record $3.2 billion profit in the third quarter, double the same quarter a year earlier and easily beating analysts' projections. Average checking and savings deposits were up a healthy 11 percent from the prior quarter. The bank's net interest income -- or what the bank makes on loans, rose a remarkable 43 percent over a year ago.
Still, the results also reflect a less hopeful trend: Loan demand remains weak, and banks continue to pare lending in certain areas. Average total loans at Wells Fargo actually slid 2.8 percent to $810.2 billion from $833.9 billion in the previous quarter, as the bank reduces its exposure to higher-risk loans. This includes billions of dollars in risky option-ARM loans that Wells Fargo acquired through its deal to buy Wachovia. With option ARMs, people could choose between different payment options; in some cases, borrowers could defer interest payments and add them to the loan's principal.
Credit quality remains a problem. While the pace of growth in loan losses at Wells Fargo has slowed from a year ago, they continue to rise -- forcing the bank to set aside more money to cover future losses. Overall, bad loans at the San Francisco-based bank hit $23.45 billion in the third quarter, or 2.93 percent of total loans, compared with $18.34 billion, or 2.23 percent of loans, in the previous quarter.
This worsening credit quality is viewed by analysts as one reason the bank has not repaid the $25 billion in taxpayer funds it received from the federal government last year under the Treasury's Troubled Asset Relief Program, or TARP.
In its earnings statement Wednesday, the bank said it expects the level of troubled loans to "remain elevated for a period of time," with losses on consumer loans peaking in the first half of next year and gradually declining as the year progresses. "The recovery may take some time to gain momentum and changes in the economic outlook could affect this time horizon," said chief credit and risk officer Mike Loughlin.
Shares of Wells Fargo fell $1.56, or 5.1 percent, to $28.90 on Wednesday.
It was a similar story at U.S. Bancorp. The Minneapolis-based bank reported stronger-than-expected profits, healthy deposit growth and a rise in interest income. Yet, like Wells Fargo, the bank had difficulty finding new places to lend money. "Overall demand for new credit is not robust," said Richard Davis, chief executive officer, in a conference call Wednesday with analysts. "Our customers are efficiently managing their businesses and prudently saving for the future."
The bank reported, for instance, that its average commercial credit-line customer was using just 32 percent of its line of credit, down from 35 percent in the second quarter. "It's a big falloff," Andy Cecere, chief financial officer of U.S. Bancorp, said in an interview. "Businesses are doing the same things as consumers. They are de-leveraging. They are managing their balance sheets very tightly."
Even TCF Financial Corp., a Wayzata-based regional bank that has seen far fewer loan problems than its big-bank rivals, has had some difficulty putting money on the street. Though TCF's fee and interest income remained strong, both its consumer and commercial business portfolios shrank in the third quarter over the same period a year ago. The bank's commercial business portfolio fell 12 percent to $477 million from $544.8 million.
"Commercial companies with lines of credit aren't using their lines, which suggests that most businesses are still in protection mode, or shrinking," said Jaime Peters, a bank analyst at Morningstar. "It certainly suggests that the economic recovery will be more mild and gradual than hoped."
Yet, Main Street banks such as TCF, U.S. Bancorp and Wells Fargo are in a stronger position to pick up new business once the economy starts to recover, argue some analysts. That's because their balance sheets are still in better shape than either giants like Citigroup and Bank of America or many of the smaller regional banks such as Marshall & Isley Corp. of Wisconsin that are weighed down with large amounts of troubled commercial real estate loans.
Both U.S. Bancorp and TCF were among the first banks in the nation to return TARP funds, and there already is speculation among analysts that they will move to increase their stock dividends in 2010 after slashing them this year to conserve cash.
"The stronger banks are starting to make a move," said RBC Capital Markets analyst Jon Arfstrom, "because they were the banks that never had problems that were that deep."
Chris Serres • 612-673-4308
