As you now know, America has put a ring fence around its biggest banks and created a system of too big to fail. As a solution to this problem, the powers that be have decided the best course of action is to create even bigger institutions at the top. So now we have "even too bigger to fail" [sic] with Citigroup (C), Bank of America (BAC), JP Morgan (JPM), and Wells Fargo (WFC).
The latter 3 are now conglomerates of broken banks stuffed inside their hulls - Countrywide and Merrill Lynch inside BAC, Bear Stearns and Washington Mutual (largest S&L in America) inside JPM, and Wachovia (previously the 4th largest bank) inside Wells Fargo (which I believe was the 5th largest at the time). Incredibly the powers that be tried to stuff Wachovia inside Citigroup before Wells Fargo jumped ahead.
If you only read one story today - please refer to this entry back in November on how these mega mergers created massive tax windfalls, most pleasantly snuck into the TARP plan by Wall Street Defender-in-Chief Hank Paulson [Nov 13, 2008: A Quiet Windfall for Banks].
But I digress - essentially we have 4 monsters, with the smallest, Wells Fargo at $1.3 Trillion in assets, over 4 times the size of the next largest US based financial institution - PNC Financial (PNC) at under $300 Billion, which is itself a combination of 2 super regionals, National City and PNC. I just outlined that to give you the scope of their girth when they raise fees across a range of services in the years to come and you sit aghast thinking "I bailed these guys out!?" You will take those increased fees, and like it - remember they are "too bigger to fail".
There are so many magic tricks, TARP funds flowing, FASB rules changing, tax benefit handouts flying - I cannot keep track with these 4 giants. The banking business in larger firms has enough black boxes even in good times - I cannot even fathom trying to dissect what is in the rabbit hole nowadays. So instead, I want to look at the next tranche of (super) regional banks below those "chosen 4".
This group has been on fire of late - go figure with all the favors done for the industry [Apr 16: Three Banking ETFs to Play your Taxpayer Money Funneled into Financials] and I'd like to use Friday's BB&T (BBT) earnings as a relatively clean look at how the banks will "save themselves". I'd like to stress it is all relative in banking, and there are a lot of moving parts in the (super) regionals as well, but much less so than the "big 4".
BB&T, with $150 Billion in assets, is a regional bank in 10 southern and mid Atlantic states and is at the bottom of the "top 10" of what I'd consider "commercial banks" - i.e. doing things you'd traditionally associate with a bank rather than selling "innovative" securitizations to help attempt to bring down the western world's financial systems. Further, the CEO is one of those straight shooters we do indeed love [Sep 30, 2008: BB&T CEO Slams Bailout Bill]
He adds the primary beneficiaries of the proposed rescue are Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS). The U.S. Treasury, he says, is “totally dominated by Wall Street investment bankers,” and “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries.”
Allison also said it is “inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.”
Obviously CEO John Allison had no chance at being the next US Treasury Secretary with talk like that.... unfortunately Mr. Allison has retired, but his replacement Kelly King does not appear to be a shrinking violet (more on that later).
So as we've laid out, the yield curve is so in the banks' favor, most of your nephews and nieces, at least those who have begun to crawl, will be able to run these banks at a profit. And as long as you ignore all the current loans on the balance sheet (and their burgeoning losses) we're all winners here. As the data below shows, it's just going to be a matter of "out earning" the losses - having the Fed and Treasury create incredibly favorable conditions for banks with hopes that gains from such a low borrowing cost, along with the refinance boom, will create earnings to fill the gaping holes by a deteriorating consumer.
And if the banks can't do that on their own? Well that's where you come in (again). As I said... any toddler can do this bank CEO thing now. But not to worry, massive compensation rewards will be showered from the heavens by starry eyed Boards of Directors for CEOs who "somehow" managed to guide the most troubled of institutions through these times. Personally I think the taxpayer or at least Ben Bernanke should get all the bonus payments, but I'm an outlier.
In summary format - borrow for near nothing from Fed, lend for much higher than near nothing to consumer. Excite consumer into spending again with Fed-induced low rates to try to recreate house ATM - make money on the refinance. Rinse. Wash. Repeat. If things get very dire send loans to Fed balance sheet, let taxpayer deal with it. Pay out bonuses. It's a win/win/win.
- Amid an increasing number of analysts forecasting lower earnings and a hefty dividend cut this year, the bank reported $318 million in profit yesterday despite a sharp increase in nonperforming assets and loan losses. The net income, however, was down 26 percent from a year ago.
- Those negatives were offset primarily by a surge in new and refinanced mortgage loans, increasing loan and fee revenues by a double-digit amount. Kelly King, the bank's president and chief executive, said that BB&T continues to gain deposits from what he considers weakened competition in its territory.
- As a result, the bank posted diluted earnings of 48 cents a share, beating by 16 cents the average forecast of analysts surveyed by Zacks Investment Research.
- BB&T has loomed larger in the industry spotlight recently because it has been one of the few large banks to avoid a dramatic earnings hit or loss since the credit crisis began in mid-2008.
- The bank's tangible common equity -- a popular measure of a bank's financial strength -- improved 40 basis points to 5.7% over the first three months of the year.
Here are the increasing losses...
- The bank did report during the quarter a 203 percent increase in its loan-loss provision to $676 million, a more than 300 percent increase in its unpaid loans to $388 million and a nearly tripling of nonperforming assets to $2.76 billion.
- Those increases were driven by continued deterioration in housing-related credits, with the largest concentration of credit issues occurring in Georgia, Florida and metro Washington.
And here is how they will offset it, due to largess of Federal Reserve
- BB&T posted a 13 percent increase in loan revenue to $1.1 billion, benefiting from lower mortgage rates.
- Fee income jumped 34 percent to $1.03 billion, meaning that BB&T is drawing closer to a 50-50 split in revenue from loans and fees that many of its peers have achieved.
Now, Bank of America (BAC) reported yesterday morning with its 23,188 moving parts and Wells Fargo (WFC) reports mid week with its more manageable 7,216 moving parts. Good luck with the black boxes there... but we can see above the basic game plan for banks going forward. And until Uncle Ben Bernanke takes his foot off the 0-0.25% Fed funds rate (which will be a LONG time coming per his fear of repeating mistakes of Great Recession), all current loans are windfalls for banks. Just remember, ignore their old loans (wink wink) and even if you choose to pay attention to them, remember we defeated the accountants a few weeks back who were the cause of all our ills - go FASB go!
Ah yes, to conclude back to our new CEO Mr. Kelly...
- Chief Executive Kelly King on a conference call pledged to repay the bank's $3.1 billion of taxpayer money from the government's Troubled Asset Relief Program "as soon as it is humanly possible," calling the investment "destructive."
- "I frankly consider (the) investment in our company to be destructive," BB&T's King said. "It creates excessive controls, it has a negative impact on our people and our strategies, (and) it runs a great risk of politicizing the lending process, which is very unhealthy."
I find great irony that the bank CEOs who serve the Washington D.C. area seem to come from such a different tree than the political creatures that permeate the region.