Despite the rapid collapse of
IndyMac Bank, growing concerns over the health of around 100 other
US banks, more regulatory and criminal investigations over lending
practices in the run up to the subprime collapse, and widespread
unease over the long-term viability – and solvency – of Freddie Mac
and Fannie Mae, interim figures from the major US banking groups
were not as downright terrible as many analysts

The biggest casualties were Washington Mutual (WaMu) and
Wachovia. A truly awful set of second-quarter figures from Wachovia
and WaMu, which reported the biggest quarterly losses in their
histories ($8.9 billion and $3.33 billion, respectively), led to an
initial surge in their share prices.earnings

But despite short-term optimism that saw a number of banking
stocks skyrocket – in the five days to 23 July, Bank of America’s
share price jumped 75 percent to $32.40 from a low of $18.44 while
Citi’s rose by 40 percent – on 24 July, US financial stocks
suffered their worst one-day fall since 2000 in part over fears
about the viability of Washington Mutual’s business model.

In the second quarter, WaMu’s total loan-loss reserves increased
by $3.74 billion to $8.46 billion, as it set aside a total of $5.9
billion during the quarter to cover bad loans. And while the
company, the largest savings-and-loan ‘thrift’ in the US, did
manage to report a 13 percent increase in its net interest income
for the quarter compared to a year ago, its fees and commission
income collapsed, falling 68 percent to $561 million as a result of
a steep decline in mortgage income.

It said it now expects accumulated residential mortgage losses
to total $19 billion.

A reduction in profits at all major banks

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With the notable exception of PNC Financial, which reported net
income unchanged at $0.88 billion for the first two quarters of
2008, the reporting season witnessed a reduction in profits at all
major US banks for the first six months of the year.

Focusing just on the banks’ retail banking figures, PNC also
compared favourably to its peers, with net income down a mere 20
percent across the first half of 2008. San Francisco-based Wells
Fargo did better, with retail net income down by only 11.3 percent
compared with a year ago, buoyed by its industry-leading cross-sell
ratio. Its ratio rose to 5.64 products per household in the second
quarter, with 23 percent of its household customer base having
eight or more products, its long-term goal.

Wells Fargo also posted the top net interest margin of its
peers, 4.92 percent, in the second quarter.

PNC’s relatively strong performance was boosted by a rise in its
net interest margin by 44 basis points to 3.47 percent. As a
result, Pittsburgh-based PNC’s net interest income rose 34.5
percent compared with the first half of 2007 to $1.83 billion; by
contrast its fee income rose by 3 percent to $1.97 billion.

A major part of PNC’s strategy has been its focus on growing
non-interest bearing deposits, while it has also benefited from a
conservative lending policy and avoidance of high-risk subprime
lending (see RBI 582).

A company spokesman told RBI: “The bank positioned its
balance sheet to emphasise risk adjusted returns and that decision
has in many cases set us apart from our peers… the result of that
effort is apparent in those earnings.”

$58 billion in write-downs

A smaller-than-expected loss from Citi for the quarter of $2.5
billion helped cheer the markets initially. Citi has lost around
$17.4 billion over the last three quarters and incurred more than
$58 billion in write-downs. But the group said it was adequately
capitalised and would not need to seek any further emergency
capital infusions.interest margin

Its retail arm, made up of its Consumer Banking and Global Cards
units, was among the worst performing of its peer banks for the
first half of the year, with net income down 77 percent compared to
the same period last year.

Bank of America (BofA), the country’s largest retail bank in
terms of customers, branches and assets, posted its fourth
successive quarter of declining profits, with group-wide and retail
banking net income falling by 58 percent and 62 percent,
respectively – but the figures beat analyst expectations. It also
provided a bullish update of its acquisition of the US’ former
largest mortgage supplier, Countrywide Financial, despite
Countrywide posting a $2.33 billion second quarter loss.

“Countrywide is on track and adding to the profits of Bank of
America as we speak,” stated BofA’s president and CEO Kenneth

Talking about BofA’s results excluding Countrywide, he said:
“The fact we can absorb $3.6 billion in credit losses, take $1.2
billion of additional write-downs, add $2.2 billion to our
allowance for credit losses, and still earn $3.4 billion should
tell investors something about our earnings power.”

A boost to the beleaguered sector

Political – and financial – support from the US government for
the country’s two largest mortgage finance companies, Fannie Mae
and Freddie Mac, by way of loans and equity investments, has
provided a boost to the beleaguered financial services sector.

Concerns that Fannie Mae and Freddie Mac, which together own or
guarantee around one half of the $12 trillion in outstanding US
home loans, had insufficient capital to cover mortgage writedowns
and losses had led to a collapse in their share prices – 45 percent
and 60 percent, respectively – in the four week period up to

But in an indication that further trouble may be ahead, a
downbeat assessment of a possible US banking sector recovery was
provided by regulator the Federal Deposit Insurance Corporation

The collapse in mid-July of $32-billion-asset IndyMac Bank, the
third-largest US banking failure of all time, was the eighth bank
failure in the US since February 2007, and according to the FDIC,
it is now monitoring what it termed 90 other “problem

interest margin

Douglas Blakey