The megabanks have settled back to earth as they all reported very modest Q2 gains as compared to Q1. Goldman Sachs (GS) reported that their profit declined 82% in Q2. Previously commercial banks JPMorgan Chase (JPM), Citigroup (C), and BofA (BAC) all reported declines.
The headline for the group is Goldman because of their (former) stellar reputation. They had $1.15 billion of settlements related to their SEC fraud allegation settlement of $550 million and a tax settlement with the UK regarding the taxation of bonuses. If you strip out the settlements they would have had EPS of $2.75 vs. $4.93. What was really interesting was that their mainline business, trading operations, was off 39%; apparently they bet wrong on market volatility because they didn't see the euro crisis coming:
Mr. Viniar [CFO] said the firm was caught off guard by the market's volatility. Goldman's equity derivatives were on the wrong side of bets that stock-market volatility would ease during a quarter when equities had wild swings.
"We didn't hedge it fast enough, let's put it that way," he said. "We were reducing position size and hedging things, but things spiked really dramatically really fast."
I wonder how they measure risk and I wonder if their risk models have changed, post-crash.
Enough of Goldman, what is significant in looking at the economy is that the commercial banks were down. Almost every one of them.
Let's start with the better news. This morning, Wells Fargo reported earnings were up 20% QoQ, and up 3% YoY. They did well in most areas and reported overall gains in lending. But, digging a bit deeper, you will see that total loans declined 7.5% YoY and 3.2% from Q1. They said they saw improving loan conditions in the last 30 days and their charge offs are declining, a 16% QoQ improvement. "On the commercial side, for the first time this year, we
