In an article by CNBC it was estimated that 2012 will finish with 230,000 layoffs from U.S. banks. In addition, it's estimated that banks may layoff an additional 150,000 workers in 2012 which only feeds fuel to the fire of the many angry Americans and their perception of banks. It could take years to unravel the many problems of U.S. banks but if we consider the many layoffs, new regulations, the housing crisis, and the European financial crisis it's obvious that the banking industry's immediate future doesn't look so bright. However, is that reason for U.S. banks to be laying off so many of its employees? And are large banks facing such a crisis that there is a need to layoff so many workers?
|Company||Ticker||Revenue (TTM)||Net Income (MRQ)|
|Citigroup||(NYSE:C)||$65.78 Billion||$3.771 Billion|
|Bank of America||(NYSE:BAC)||$75.36 Billion||$6.232 Billion|
|JPMorgan||(NYSE:JPM)||$93.43 Billion||$4.262 Billion|
|Wells Fargo||(NYSE:WFC)||$72.87 Billion||$4.055 Billion|
|Morgan Stanley||(NYSE:MS)||$34.69 Billion||$2.199 Billion|
When 5 of the largest banks in the U.S. have posted more than $20.5 billion in net income during its most recent quarter it's difficult to justify so many layoffs. As you can see each of these companies have reported a fairly substantial year in revenue over the last 12 months despite new regulations, low interest rates, and a slumping housing market. And although we don't know what will become of the economy during the next several years I see no reason why so many employees have been laid off during the last year and why so many are expected to be laid off in 2012.
As I said, there are problems that may lurk in the future that could drastically affect the banking industry, but we simply don't know to what extremity. During the last year there have been several changes to regulations that are expected to affect the revenue of the largest banking companies, and investors fear that even more may come in the future. Each of these banks has to operate with high costs despite dropping interest rates which is limiting its revenue to an additional degree. And as of late, the feds along with private investors and state attorney generals are investigating into the mortgage crisis and the banks influence on the crisis which could bring even more lawsuits than what each of these banks have already faced.
This upcoming week could be even worse for the banking industry as housing data may be the driving force of the economy. During the first three days of trading we will receive data regarding home builders confidence, housing starts in November, and existing home sales. This data could expose further issues into the housing crisis which is expected to come under heavy scrutiny with an additional claim that the housing market may be worse than expected and data may be incorrect because of double counts. A report is expected to be released this week, which isn't expected to affect interest rates or home prices but will show weaker data surrounding the housing market. The current state of the housing market and the number of potential lawsuits that banking companies could face is mindboggling and is a large contributor of fear among banking executives, investors, and even consumers.
As investors I think we sometimes forget about the people who are being hurt by the choices of banking executives to cut employment costs to satisfy investors and meet quarterly expectations. When you really stop and think about the fact that these five companies reported a combined net income of more than $20.5 billion during the last quarter but are firing more than 230,000 middle class Americans it makes you consider the possible driving force behind the decision. A company firing so many employees may look good on a balance sheet but it keeps those who are losing their jobs unable to contribute to economic growth. These 230,000 people are being forced to cut costs much more aggressively than any of the large banks. Most are unable to vacation and don't have expendable income to dine out, buy merchandise or new vehicles. In addition these people cannot contribute to the economy with taxes because you can't pay something that you haven't earned, which places even more stress on American debt and the unemployment numbers which are so crucial to the performance of the stock market.
With each passing day it seems the banking industry becomes less valued and more employees are laid off, while company executives are being compensated with larger bonuses. Bank of America posted the largest amount of income among the five banks but recently implemented a $5 checking fee that only affects its less wealthy customers. Yet after months of protest and angry customers the fee was lifted, but not before 1000's of customers switched banks and more than 300,000 of its customers signed a petition demanding the fee be reversed. The number of those being laid off compared to the amount of income being reported doesn't add up and makes you consider why these banks are making such drastic changes.
The bottom line is that we simply don't know the problems that may arise in the financial markets during the next few years. I've heard analysts trying to predict how exposed American banks are to the European financial crisis, or the euro zone, however the numbers are so large that I'm yet to hear anyone who can give a specific percentage of the banking industry that's exposed to this crisis. In addition, we don't know what part these companies played in giving home loans to unqualified borrowers. It seems like every other week we hear of yet another lawsuit as a result of the banking industries decisions during the financial crisis in 2008. And with the number of lawsuits against banks, the new regulations, the housing crisis, and the unknown exposure to Europe we must consider that the decision to layoff so many employees may mean that trouble is on the horizon and that the financial industry is much more troubled than what we realize.
I will conclude by saying the banking industry and the executives of the large financial institutions have the ability to contribute and change the state of our economy. It's difficult to judge the financial impact of 230,000 less employees, however this number is estimated throughout the entire banking industry, not just the five banks that I've mentioned. However, if the average salary of the laid off employees was $50,000 annually then these five banks could've paid everyone of the laid off employees and still posted a large profit. This fact leads me to believe one of two scenarios: either the future costs and expenditures are far greater than what we expect or it's simply a situation where large publicly traded companies are trying to meet quarterly expectations. I've been bullish regarding the economy for the last two years and I haven't changed my disposition because of the euro crisis. I believe the economy is growing and that the only substantial issues within our economy are high unemployment rates, a stalled real estate industry, and even increased costs of materials. Therefore I don't believe these changes are related to future problems within the economy nor do I believe that these large banks are cutting costs in preparation of more difficult days ahead.
In my opinion, the decision to lay off thousands of people was an attempt to control the stock and meet expectations. Regardless of what issues lie ahead within the financial market most banking stocks are already priced for a recession. And if you compare the fundamentals of large banks today to the years of the recession you would see that these banks are much fundamentally stronger. Yet these banks choose to layoff a large number of employees, and this fact is one of the many issues that have so many people angry at the banking industry. We spent so much money bailing these banks out and it doesn't appear they are making the contributions to help the economy. These banks could've very easily avoided any layoffs and still posted a profit. And the truth is that I don't think it matters what these banks report in earnings; it appears they're all trading lower regardless of fundamentals because of the global economy and the fear surrounding Europe. Considering the amount of money these companies are earning and the number of people they are laying off I don't see how investors can be bullish and I understand why Americans are frustrated, and even angry, at how these banks are spending the money that tax payers spent in order to keep them afloat. I think next year will be interesting and we'll see if there any additional expenditures that drove executives to make the decisions to fire employees. However, I doubt that any regulations or new charges will affect the bottom line of these banks. Because what the government doesn't realize is that they can tax and take money from the banks all year long and all it will do is result in more employees getting laid off. These companies are going to meet quarterly expectations regardless of any action by the government. And until there is a regulation in place that limits the number of layoffs by large public companies they will continue to layoff, which will continue to keep our economy at a stall with higher unemployment rates and ultimately keep banking stocks lower.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.