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U.S. Banks Still Profitable Despite Write-Downs, Losses

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By JOHN M. BERRY, Bloomberg News

Published: January 24, 2008

With all the large write-downs and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.

That inattention has raised unnecessary concerns that banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.

Some commentators have said banks are in the worst shape since the Great Depression. That isn't close to being correct.

Other analysts have raised the specter of the stagnant Japanese economy of the 1990s, when banks there were crippled by huge losses when a real estate price bubble burst at the beginning of that decade. This comparison also is off-base.

Even Citigroup, by far the hardest hit of the big U.S. banks by subprime-related problems, earned $3.62 billion last year. That was with a $9.83 billion fourth-quarter net loss and more than $22 billion in write-downs and additions to loan-loss reserves.

For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the 34 percent drop in fourth-quarter profits from a year earlier. Its full-year $15.4 billion profit, a record, was largely ignored. So were the bank's record annual revenue of $71.4 billion and its record earnings per share of $4.38.

On Tuesday, reports showed that the credit crisis all but wiped out fourth-quarter earnings at Bank of America and Wachovia - profits fell 95 percent at Bank of America and 98 percent at Wachovia.

Still, both banks made money. Bank of America recorded fourth-quarter net income of $268 million, or 5 cents per share, in the three months ended Dec. 31, down from $5.26 billion, or $1.16 per share, a year ago. Revenue fell 31 percent to $12.67 billion.

Wachovia said Tuesday that its fourth-quarter profit fell to $51 million, or 3 cents per share, from $2.3 billion, or $1.20 per share, in the same period a year ago.

For 2008, Bank of America expects earnings to rebound more than 20 percent this year as lower borrowing costs make lending more profitable and losses on debt holdings decline, Chief Executive Officer Kenneth Lewis said Tuesday.

"Our economic expectations project minimum GDP growth and a slowdown, not a recession, as we expect a pretty rocky start to the year improving thereafter," Lewis said.

SunTrust Reports Poor 4th Quarter

It was much the same on Wednesday, when Atlanta-based SunTrust Banks became the last of the 10 largest U.S. banks to report fourth-quarter results. SunTrust - which gets about 30 percent of its deposits from Florida - said its fourth-quarter profit was almost wiped out by costs from the bailout and home loan defaults.

SunTrust said fourth-quarter earnings plummeted to $3.3 million, or 1 cent a share, from $498.6 million, or $1.39, a year earlier. For the full year, profit available to common shareholders fell 24 percent to $1.6 billion as revenue gained 0.4 percent to $8.25 billion.

William Seidman, a commentator at CNBC who headed the Federal Deposit Insurance Corp. from 1985 to 1991, said the situation now is nothing like that period, when hundreds of banks and thrift institutions went broke.

"The banks are not in anywhere near the trouble they were in when I was at the FDIC," Seidman said in a Jan. 17 interview. The handful of banks the FDIC regards as troubled today don't include any big ones, he said.

Economist Robert E. Litan, a senior fellow at the Brookings Institution, said the banks are in far better shape than the dire assessments suggest.

Noting how quickly Citibank has been able to raise money to replace the capital depleted by losses, he added, "Why would anybody buy stock if they thought Citi was going down the tubes?"

"And this is nothing like the Japanese situation," Litan said. "In that case, the banks sat on their losses and were unable to make loans. That's just not where we are now."

Stop Moaning About Losses

During the 1990s, former Federal Reserve chairman Alan Greenspan and other Fed officials advised Japanese regulators to push the banks to write off their bad loans, recapitalize themselves and get back to business. That didn't happen for years, and after it did - and Japanese corporations also cleaned up their balance sheets - economic growth resumed.

So instead of just moaning about how much some institutions have lost, everyone also should be applauding that the potential losses are being recognized and new capital is being raised.

The story is largely the same at Merrill Lynch & Co., the world's largest brokerage. It reported a fourth-quarter net loss of $9.83 billion after write-downs of $15 billion on assets related to subprime mortgages and hedges. It also had a full-year loss of $7.8 billion.

Merrill also has raised substantial capital from outside investors and additional cash from selling assets.

Goldman Sachs avoided big losses on subprime-related investments by hedging its positions. Its net income for 2007 was a record $11.6 billion.

Credit isn't as readily available as it was for several reasons, including a less favorable economic outlook, tighter lending standards and a lack of a secondary market for some types of loans such as jumbo mortgages.

On the other hand, the interest rates many borrowers are paying have dropped.

The credit well hasn't run dry and it's not about to. And the nation's banks will be supplying a large share of it.

John M. Berry is a Bloomberg News columnist.

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