In contrast to a year ago,
half-year results from the big US banking groups are dominated by
strong performances in investment as opposed to retail banking
units. The big players are being dragged down by weak performances
from consumer finance and, in particular, card units. Douglas
Blakey reports.

This year’s US banking interim results present a mixed picture but
there was one clear conclusion: for the big US players, investment
banking earnings have trounced weak retail ones as consumer loans
and credit card debts continue to mount up. While investment
banking revenue in the second half of 2009 is not likely to be as
strong as that seen in the first half, credit card losses in
particular are continuing to rise at a dramatic rate with little
improvement expected in the next year. US consumer loan charge-off rates

Financial Armageddon was, however, averted,
with sector credit losses showing no signs of coming close to the
levels employed in the recent US Treasury Department’s stress tests
for the nation’s 19 largest banks.

On a less positive note, the year to date has
witnessed the failure of 72 banks (see table), more than
in the period from 2001 to 2008 and already the highest annual
number since 1993.

Faltering giants

None of the bank failures this year
has involved a large, national player, but doubts persist about a
number of regional lenders, in particular Guaranty Bank.

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With assets of approximately $16 billion and
more than 150 branches in Texas and California, Guaranty has failed
to file results since the third quarter of last year and its
anticipated failure would represent the biggest banking collapse
since the September 2008 demise of Washington Mutual.

Wells Fargo’s retail banking-focused Community
Banking division posted a creditable 42 percent increase in
first-half earnings to $3.85 billion while group profits beat
analyst forecasts at $6.22 billion, up 66 percent from a year ago.
The bank’s celebrated cross-sell ratio rose again in the second
quarter, reaching a record 5.84 products per customer for retail
bank households and 6.4 for wholesale and commercial customers
(see cross-selling survey, RBI 611). It also scored a
deposits hit, with consumer checking and savings deposits
increasing substantially to $594 billion thanks to the inclusion of
the Wachovia franchise.

In common with the rest of the sector, Wells
Fargo suffered a sharp increase in loan losses, writing off $4.39
billion, or 2.11 percent of average loans, up from $3.26 billion,
or 1.54 percent, in the first quarter.

At Citigroup, overall retail banking earnings
were impossible to discern following the bank’s decision to report
for the first time as two separate entities, with both Citicorp
(‘Good Bank) and Citi Holdings (‘Bad Bank’) containing retail
banking units.

In the second quarter, Citigroup did post a
profit of $4.28 billion, compared to a year-ago loss of $2.5
billion, but the figure was augmented by the one-off $6.7 billion
gain from its sale of brokerage Smith Barney.

The combined group did however achieve one
goal, shrinking its total assets by 11 percent to $1.85 trillion
from a year ago.

A further reduction is on the cards if the
bank meets its target of selling up to 20 consumer finance
businesses, many of them located in Europe. Following release of
its first-half results, Citi’s chief executive Vikram Pandit told
Singapore media that the planned move was due to the shift in the
consumer finance market where “there is less funding availability
and they are probably less robust as businesses.”

JPMorgan Chase, commonly regarded as riding
out the storm better than its sector rivals, posted group net
income up by 11 percent in the first half, to $4.86 billion.
However, more than $3 billion of this figure was derived from its
investment banking unit, with its retail financial services arm
contributing $489 million (up 155 percent from $192 million in the
first half of 2008).

But the real nightmare for JPMorgan Chase was
the performance of its card unit, posting a loss for the first half
of $1.2 billion, compared with a profit of $859 million a year

Chase’s managed net charge-off rate for the
second quarter was 10.03 percent, up from 4.98 percent in the prior
year and 7.72 percent in the prior quarter, with Chase gloomily
forecasting no respite for the foreseeable future.

At Bank of America (BofA), the position was
worse, with the bank posting card unit losses of $3.49 billion for
the first half, compared with a profit of $1.4 billion a year ago.
Overall, BofA’s retail divisions, combining its Deposits branch
banking unit with its Global Card Services, fell to a first half
loss of $2.38 billion, compared with an H108 profit of $3.76

Positive drivers in the first half for BofA
included a sharp increase in retail deposits, up 26 percent
year-on-year and further growth in retail customer numbers,
including 394,000 net new current accounts and 611,000 new domestic
retail and small business credit card accounts.

At the end of the first half, BofA had total
deposits of $970 billion (a market share of 12.2 percent) compared
with JPMorgan Chase’s $865 million and Wells Fargo’s $813

Looking ahead to the remainder of the year,
BofA chief executive Kenneth Lewis told analysts it would be “much
tougher” to grow earnings. “The build-up in late stage
delinquencies and continued economic pressures will cause
charge-offs to continue to trend upward, although not at the pace
we’ve experienced recently.”

BofA’s gloomy card outlook was backed up by
figures released by the American Bankers Association, which
reported that delinquent credit card accounts accounted for 6.6
percent of overall card balances in the second quarter, up from
5.52 percent in the fourth quarter of 2008, a record high.

It added that US banks were issuing fewer
credit cards – 9.8 million new cards in the first four months of
2009, a drop of 38 percent from a year ago.

A statement from the American Bankruptcy
Institute, coinciding with the banks’ reporting season, did little
to cheer, stating that consumer bankruptcy filings hit 126,434 in
July, up more than 34 percent compared with 2008.

Branch closures

Coverage of BofA’s first-half
earnings was almost immediately overshadowed by reports of plans to
shrink its 6,109 retail branch network over the next three to five
years by as much as 10 percent. US bank failures 2001-present

A bank spokeswoman told RBI no
decision had been reached to cut the network by as much as 10
percent and said no decision had been made about which branches
would close, adding that any reduction in branch numbers was an
ongoing process without a targeted time-frame.

She did however confirm BofA’s peer-busting
success in growing its online channels, with 29.2 million active
online accounts as at 30 June and 3 million mobile banking

Analysts were quick to suggest that any branch
closures would be cost-cutting measures as BofA continues to digest
its purchases last year of Countrywide and of Merrill Lynch in
January. In the year to date, BofA has closed or applied to close
around 160 branches (while opening around 40 units) and cut its ATM
network by 105 to 18,426.

The CARD Act

As for the 12 months ahead, banks
with major credit card units have to contend with impact of the
CARD Act, due to come into force in 2010. JPMorgan Chase’s chief
executive has forecast the impact of the legislation could cost the
bank around $500 million in 2010; BofA CFO Joe Price estimated his
bank may take a hit of $700 million.

Elsewhere, without the cushion of strongly
performing investment banking operations, a number of mid-tier
players endured a painful first half. In particular, Alabama-based
Regions Bank – one of the worst performers in 2008, when it posted
a net loss of $5.6 billion – remained in the red, while SunTrust
slipped to a loss of $938 million, compared with a profit of $830
million a year ago.

A crippling first-quarter $2.6 billion
goodwill impairment charge contributed to a first-half loss at
Midwestern regional player Huntington Bancshares of $2.67 billion,
compared with a profit of $217 million a year ago. While the bank
strengthened its liquidity position during the second quarter, its
loan-to-deposit ratio remained high, declining from 101 percent at
the end of the first quarter to 98 percent at 30 June.

On a more positive note, the US economy is
showing signs of life, shrinking by only 1 percent in the second
quarter, following a 6.4 percent collapse in the fourth quarter of
2008, at the time the biggest quarterly decline since 1982.

A further glimmer of hope that the economic
tide may be about to turn was provided by figures released by
credit card direct mail tracking service, Synovate. It reported
that US households are starting to receive more credit card offers
from certain banks. Card mailers that ramped up their mail volumes
in the second quarter this year included Bank of America (77
percent more than the first quarter) and Citibank (up 65

Overall, 349.1 million credit card offers were
made during the second quarter – 67 percent down from the 1.06
billion offers received during the same quarter of 2008, but only a
6 percent drop from the 372.4 of the first quarter of this

US – top 15 retail banking groups ranked
by total group assets
  Group profit ($m) Retail banking profit ($m) Group assets ($bn)    
H109 H108 % change H109 H108 % change H109 H108 % change            
Bank of America 7,471 4,620 61.7 -2,388 3,764 n/m 2,254 1,716 31.3            
  4,862 4,376 11.1 -730 1,506 n/m 2,026 1,775 14.1            
Citigroup 5,872 -7,606 n/m n/a n/a n/a 1,846 2,050 -9.9            
Wells Fargo 6,217 3,752 65.6 3,847 2,706 42.1 1,284 1,309 -1.9            
TD Bank 2,230 2,033 9.7 588 257 128.7 574.8 503.6 14.1            
PNC Financial 737 901 -18.2 419 218 92.2 279.7 142.7 96            
US Bank 1,030 2,074 -50.3 382 558 -31.5 265.5 246.5 7.7            
SunTrust Banks -938 830 n/m -314 335 n/m 176.7 189.1 -6.5            
Capital One 112.3 1,001 -88.8 n/a n/a n/a 171.9 151.1 13.7            
BB&T 526 860 -63.5 n/a n/a n/a 152.3 136.4 11.6            
Regions Financial -111 543 n/m n/a n/a n/a 142.8 144.4 -1.1            
Fifth Third Bancorp 932 84 1,009 180 326 -44.8 115.9 111.6 3.8            
KeyCorp -714 -908 21.3 -27 219 n/m 97.7 101.5 -3.7            
M&T Bank 115 362 -68 n/a n/a n/a 69.9 65.9 6.1            
Huntington Bancshares -2,674 217 n/m n/a n/a n/a 51.3 55.3 -7.2            

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