The major U.S. banks have all reported quarterly earnings, with each facing its own issues with profitability. But while Wells Fargo (NYSE:WFC) reported solid asset growth, Bank of America (NYSE:BAC) and Citigroup (NYSE:C) continue to mend from the financial crisis. Motley Fool senior banking specialist John Maxfield digs into the reasons why in the video below.

A full transcript follows the video.


Gaby Lapera: Revenue declined in most banks. Do you want to talk a little bit about that?

John Maxfield: Yeah. This was a quarter where, we came into this quarter knowing that it was going to be a difficult one for the banks for two reasons in particular. The first was that trading revenues were down in a lot of the big banks, and that was a result of the market volatility surrounding the concerns about China's growth.

I think just this morning we saw some disappointing figures. It looks like they only grew 6.9% in their latest period relative to the plus-10% rates that we were used to a couple of years ago. The second reason was that interest rates were still low. When you have banks that earn a lot of money from owning interest-earning assets, low interest rates will have a big impact on your revenue.

For those two reasons, we saw revenue fall at virtually all of the big banks of the United States last quarter.

Lapera: Absolutely. Something to keep in mind if you're listening: Most banks have loans making up to 50% of their asset-making portfolios. When interest rates are as low as they are, it just doesn't make as much money. It's kind of a catch-22 for banks, because people complain when rates are too high, and then the banks complain when the rates are too low.

Maxfield: That's exactly right. What's interesting about this too is, the traditional business model of banks is, what they wanted is a really low short-term interest rate and then a really high long-term interest rate. All of that changed during the high inflation period in the late '70s and early '80s. Now what banks are looking for are higher short-term rates. They index all their commercial loans off those low, short-term rates.

The higher the short-term rates, the more interest they earn. The more interest they earn, to your point, because they make up about half the interest that banks earn from their asset portfolios; that makes up about half of their total revenue. That will increase as well as short-term rates increase.

Lapera: Looking at the big four banks, which are J.P. Morgan, Wells Fargo, Bank of America, and Goldman Sachs -- out of all of those, one of them had an OK quarter.

Maxfield: Yeah. Truth be told, a couple of them had a pretty decent quarter, it's just that the comparisons were difficult. The bank that a really good quarter was Wells Fargo. Just to give you some statistics, J.P. Morgan Chase, which is a phenomenally run bank, its revenue fell on a year over year basis by 6.9%. That's a pretty substantial decline in revenue. Bank of America's fell 2.5%, Citigroup's fell about 5%.

Wells Fargo, however, grew by 3%. You're looking at that wondering how in the world Wells Fargo made that happen. Let me dig into the explanation for why that happened. That's because Wells Fargo is a traditional bank, so it relies on its assets portfolio -- and therefore interest rates -- more than a J.P. Morgan Chase, or Bank of America, or Citigroup, which all have substantial Wall Street operations to counterbalance their traditional banking operations.

What Wells Fargo was able to do was, because it's still in such a strong, competitive position relative to its competitors coming out of the financial crisis -- it's still on an aggressive growth case. Whereas Bank of America and Citigroup are not only not growing, but they're still in that receding period where they're trying to get rid of bad assets on their balance sheets.

On a year-over-year basis, Wells Fargo grew its interest-earning assets by $123 billion. To put that into context, that's roughly the size of the 12th largest bank in the United States of America. That's just the one-year growth in Wells Fargo's assets. Even though it's earning less on each asset that it holds in this portfolio, because it has so many more, it's still earning more revenue from it.

Lapera: To reiterate for our listeners, it's earning less because of the low-interest environment that we're in right now. Like Maxfield said, because they own so many more [assets], they're still making more in bulk...

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.