Amid a very difficult economic environment, a number of US banks
have been able to flag up some positive retail banking performances
for 2007, writes Douglas Blakey. Some of the worst
performers, such as E*Trade and WaMu, have even started the new
year in relatively bullish moods – though 2008 will remain
tough.
While the fourth quarter of 2007, fuelled by the collapse of the
subprime mortgage market, may have resulted in the worst earnings
period for US banks since the stock market crash of 1929, there
were nonetheless some encouraging retail banking performances
announced by a number of leading players.
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Bank of America (BofA), for
instance, the country’s largest retail bank, reported
fourth-quarter net income down by 95 percent to just $268 million
due to fourth-quarter investment write-downs of $5.28 billion. But
Kenneth Lewis, BofA’s chairman and CEO, flagged up a number of
highlights within the bank’s retail banking division.
Total retail product sales
increased 9 percent in 2007 to 49 million items, with strong growth
in checking and savings products. Retail deposits were up 10
percent at year-end as a result of higher account balances and new
account openings. Debit card purchase volume was up 12 percent,
thanks to the addition of new accounts and higher usage – its
hugely successful Keep the Change debit card-based automated
savings programme continues to prosper, for instance, with around 3
million customers signing up across the year. BofA’s mobile banking
offering, launched at the start of the fourth quarter, has already
signed up 600,000 customers.
“Given [the] environment, we
certainly are not pleased with our performance… [But] we are
cautiously optimistic about 2008, though we believe economic growth
will be anaemic at best in the first half,” said Lewis.
The big gamble
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By GlobalDataThe big gamble for Lewis – and the
possible catalyst for further US banking industry consolidation –
is BofA’s $4 billion acquisition of Countrywide Financial, the US’s
largest mortgage originator and servicer (see RBI 585).
Countrywide reported a full-year loss of $704 million (its first
loss in 30 years), compared with a profit of $2.67 billion in 2006,
a dramatic fall for one of the US’s best-known financial services
brands.
Lewis said he regards the
Countrywide deal as a key element in his plan for BofA to dominate
what he has described as the three cornerstones of consumer
banking: deposits, credit cards and mortgages. The combined entity
will become the largest mortgage provider in the US with an almost
25 percent market share; currently, BofA alone has a 9 percent
market share.
The grand plan may still not work
out – a European investment firm with a 5 percent stake in
Countrywide has said it will vote against the acquisition as it
considers the deal “considerably undervalues” Countrywide
(Countrywide’s market capitalisation was hovering around $26
billion a year ago). SRM Global Fund, based in Monaco and also a
shareholder in the UK’s Northern Rock, said it would approach other
large Countrywide shareholders, including Legg Mason and Fidelity,
and urge them to vote against the BofA deal.
Bucking the
trend
Bucking the near-universal trend
for weak annual results, JPMorgan Chase reported record profits for
2007. Its performance was boosted by organic growth within its
Chase retail arm, with increases in deposits, checking accounts and
mortgage originations. Chase’s retail banking highlights included
checking accounts totalling 10.8 million, up 844,000, or 8 percent
compared with year-end 2006; average total deposits up 4 percent to
$208.5 billion; mortgage loan originations at $40.0 billion, up 34
percent year-on-year; and credit cards issued at Chase branches in
2007 up 34 percent.
At the end of 2007, JPMorgan Chase
overtook embattled Citi to rank as the second-largest US bank by
market capitalisation ($147.0 billion, down 12 percent for the year
compared to Citi’s $140.7 billion, down a huge 48 percent).
Although BofA’s capitalisation fell by 23 percent, it now ranks as
the country’s largest bank by market cap.
As for Citi, it posted net income
for 2007 of $3.62 billion compared with $21.53 billion in 2006, a
fall of 83 percent, largely due to a net loss for the fourth
quarter of $9.83 billion. Its Global Consumer division, including
its retail, cards and consumer finance divisions, reported net
income for the year down 35 percent to $7.8 billion compared with
$12.1 billion in 2006. The group has announced an end to its
current US retail branch expansion programme and will instead focus
its branch investment on metropolitan areas where it has a strong
market share of deposits or believes it can grow market share.
Citi, like other investment banks
UBS, Bear Sterns and Morgan Stanley, has been particularly humbled
by its huge exposure to the wider subprime collapse via investments
in asset-based securities and similar investments. According to
ratings agency Fitch, the total write-offs by the US Big Five –
Citi, Bank of America, JPMorgan Chase, Wachovia and Wells Fargo –
in the fourth quarter match their entire 2006 write-offs, with Citi
taking by far the largest hit.
In a report on the US market, Fitch
stated that the US banking industry has entered 2008 in its most
precarious position in years, with banks “battening down the
hatches on capital and liquidity”. The agency gave a largely
negative outlook for 2008, listing seven key issues for the US
banking community: weaker asset quality metrics; higher provisions;
difficult earning asset growth; elevated funding costs; net
interest margin compression; further mark-to-market valuation
deterioration; and litigation.
Record retail banking sales
Wells Fargo, which suffered a 4
percent drop in net income for the year ($8.06 billion compared
with $8.42 billion in 2006) as a result of a fourth-quarter profit
fall of 38 percent, its first quarterly decline in more than six
years, was helped by record core retail banking product sales of
19.7 million items, up 11 percent from 2006.
It also registered core sales per
banker of 4.93 per day, up from 4.75 in 2006 on a comparable basis;
an average cross-sell ratio of 5.5 products per household; and
increased sales of its bundled retail banking service Wells Fargo
Packages (a checking account and at least three other products), up
21 percent from 2006 and purchased by 69 percent of new checking
account customers.
“[We] did exceptionally well in
fundamental areas such as account, revenue and deposit growth and
we expanded distribution and cross-sell to both consumer and
commercial customers,” said bank CEO, John Stumpf. “Despite the
industry headwinds and challenging economic environment, our
outstanding team members produced record revenue for both the
fourth quarter and full year. We expect the environment to remain
challenging in 2008, particularly in the consumer sector.”
Wachovia, the US’s fourth-largest
bank by assets, posted full-year earnings of $6.31 billion, a 19
percent decline from $7.79 billion in 2006, having taken a $1.7
billion write-down during the fourth quarter. Retail highlights
included average loan growth of 6 percent, 4 percent growth in
consumer loans and 6 percent in deposit. Net new retail checking
accounts increased by 90,000 in the fourth quarter of 2007 compared
with an increase of 87,000 in the fourth quarter of 2006.
De novo branches
Looking to 2008, Wachovia chairman
and chief executive Ken Thompson ruled out any major acquisitions
but did highlight a major branch expansion programme. According to
Thompson, Wachovia will focus on building branches from the
ground-up, or what the bank calls de novo branches.
“De novo branches, on average, become profitable for us by
the end of the second year, and by the end of the fourth year they
have completely paid back the investment and the early losses so
that they are very profitable for us,” said Thompson. He said
Wachovia plans to open 110 new branches in 2008, heavily weighted
towards Texas and the US West.
The country’s largest thrift, Washington Mutual (WaMu), also
announced plans to expand its branch network, with between 150 and
200 new units planned in 2008. CEO Kerry Killinger said that WaMu
will target more than 1 million net new checking accounts during
2008, and that all the company’s business divisions will focus on
selling products in branches and online “like never before”. On 25
January, WaMu also overhauled its website, making the site simpler,
faster and more personalised.
Killinger’s optimism about the year ahead contrasted with a
disappointing year for WaMu. Its market capitalisation fell by
around 72 percent to value the bank at $12 billion. For 2007, WaMu
posted a net loss of $67 million compared with $3.56 billion profit
in 2006, in large part due to a $1.87 billion fourth-quarter loss,
its first quarterly loss in more than a decade.
Arguably the worst performance of 2007 among prominent firms in the
financial services sector was that of discount broker E*Trade. But
the company has, like WaMu, started the new year in relatively
bullish mood, unveiling a turnaround business plan and raising its
marketing spend by 30 percent for 2008. In 2007, despite its
well-publicised troubles, E*Trade said it opened 278,000 net new
banking and brokerage accounts, including 88,000 in December
alone.
