Despite the slow economic recovery, the big four "megabanks" are expected to post profits for the second quarter of this year, according to a new report by SNL Financial, a business intelligence services provider. JPMorgan Chase and Wells Fargo released their second quarter earnings last week, while Bank of America and Citigroup will follow suit later this week.
"The megabanks have used their size and massive market share to steal loans away form smaller banks, analysts say, and in some cases to expand their footholds in certain of lines of business," the report notes. For instance, Wells Fargo has actively been refinancing customers' home loans to extract growth from its mortgage operations while also generating fee income. All of the big four banks, each valued at over a trillion dollars in assets, have been trying to cut costs internally and divesting none-core businesses as well, the report says.
Global economic uncertainty grounded in distress over slow growth in the U.S. and the turmoil in Europe means that the banks' profits will be moderate, the report says, citing Sam Pappas, president and CEO of investment advisor Mystic Asset Management Inc. Pappas says that investors are less willing to take risks given this uncertainty to the detriment of capital markets and investment banking operations.
"I think you can be pretty confident that, on the investment banking side, we will see less revenue," Pappas says in the report.
That uncertainty, the report notes, was compounded this past quarter by JPMorgan's loss of more than $2 billion on a single bad trade, leading to a great deal of public and regulatory scrutiny into the banks investment operations.
In this unsteady investment environment retail-oriented banks, like Wells Fargo, are likely to have the strongest earnings. But continuing high unemployment could pose a threat to lending activities as well, the report warns.
"These big banks have money to lend, but they don't have a lot of qualified people to lend to, so if the economy slows down and job creation slows with it, lenders are bound to get leery and lending could slow," Sam Pappas says in the report.