The nation's largest banks, JPMorgan Chase
1. Loan quality is improving
There's no question about it: the flood of delinquencies and chargeoffs that decimated banks over the past two years is abating.
At JPMorgan's retail banking unit, net chargeoffs fell to 2.11% from 2.88% in the first quarter. Credit cards 30+ days delinquent fell to 4.96% from 5.62% in the first quarter. At Citigroup's consumer banking segment, loans 30-89 days delinquent fell to 3.06% from 3.19% in the first quarter. For Bank of America, total net chargeoffs fell to 3.98% from 4.44%.
What's behind these improvements? One, unemployment is the single most important variable in loan quality, and it has stabilized, if not slowly improved. That's especially important for consumer loans like credit cards, where the correlation between employment and delinquencies is nearly perfect.
Two, a lot of the atrociously bad credit has already been cleansed from the system. In 2009 alone, banks wrote off $83 billion of credit card debt, or about 9% of the total amount outstanding. That's simply awesome. Banks are now dealing with credit books tied to the health of the economy, rather than the underwriting idiocy of years past.
Three, the second quarter can bring a seasonal improvement in credit quality as tax refunds are distributed. According to the IRS, the average tax refund this year was $3,036. That goes a long way for the average household with a minimum monthly credit-card payment of a few hundred bucks.
2. The profit mix is much healthier
Last week, I predicted that this quarter's fixed-income trading would remain stable over last quarter. That was wrong -- it fell considerably at all three banks.
But this isn't necessarily bad news. Fixed-income trading has really been the sole profit-driver for the past year. Yet as it tanked this past quarter, overall profitability held up well for the most part, showing a more even earnings mix between divisions. Banks' core divisions like consumer banking are doing better, while transient profit drivers like fixed-income trading are pulling less weight. This is exactly what investors should want to see: banks making money from banking.
Some analysts are quick to note that all three banks pulled money out of loss reserves, which explains why lending profits glistened this quarter. While true, I wouldn't look too much into this. Loss reserves were able to be drawn down because delinquencies fell faster than expected, which bodes well for future profitability. Drawing down loss reserves isn't an accounting gimmick. It's a legitimate sign of improvement.
3. Financial reform is going to hurt. Bad.
Here's what B of A CFO Chuck Noski had to say about financial regulation:
we estimate that the decrease in annualized [card division] revenue before mitigation to be as much as $1.8 billion to $2.3 billion starting in the third quarter of 2011 ... we estimate that the impairment of goodwill to be reported in the third quarter of 2010 could potentially be in the range of $7 billion to $10 billion.
That's certifiably awful, and I think much worse than anyone thought. If these estimates are accurate, Friday's 9% plunge in B of A's stock price was probably well justified.
Jamie Dimon of JPMorgan was mum on financial reform, while CEO Vikram Pandit of Citigroup had this to say:
On the debit interchange, debit purchase is not a significant business for us. Our volumes show that and we are about one-tenth of the volume size of market leaders. Another key point on consumer reform is that our Regional Consumer Bank is much more international than most. 53% of first half revenues came from outside the U.S. and they reflect a substantial part of our profitability.
That's comparatively good news for Citi; Debit card interchange regulations are what Noski was referring to.
Citigroup is a big dog in the credit card market, which was affected by the CARD Act of 2009. B of A and JPMorgan are the ones that will take the brunt of the debit interchange regulations, which were passed as part of the current financial reform bill. If card divisions become as walloped as Noski suggests, Visa
The irony is that interchange regulations may prove to be the most costly, cumbersome, and restrictive regulations in the financial reform bill, yet interchange had absolutely nothing to do with the financial crisis.
You take it from here
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