January 27, 2015

Banks face uphill battle with earnings

Banks have had a hard time generating satisfactory earnings growth lately, and this difficulty could easily continue in 2015. Banks both large and small have suffered these challenges, as the major financial institutions and the regional ones have been reporting lackluster earnings so far this year. Legal costs and compressed loan margins are the major drags for the larger banks.  Community banks are also feeling the pinch in generating good quality assets.

Big banks report annual loss
During the week ending Jan. 23, the six largest U.S. banks reported their first annual decline in profits since the financial crisis, according to SNL Financial data reported on by The Wall Street Journal. JPMorgan Chase, Morgan Stanley, Bank of America Corp., Goldman Sachs Group Inc., Citigroup Inc. and Wells Fargo & Co. generated combined profits of $72.52 billion last year, compared to $77.13 billion in 2013.

Of these six major banks, Wells Fargo had the best year, producing $23.61 billion in earnings, while JPMorgan Chase yielded $21.76 billion in these profits, according to The Wall Street Journal. These two far surpassed the others in the top six, as Goldman, Citigroup, Morgan Stanley and Bank of America earned $8.48 billion, $7.5 billion, $6.34 billion and $4.83 billion, respectively.

One major contributor to the pack's failure to continue its five-year streak of annual earnings growth was legal expenses, The Wall Street Journal reported. These costs caused Bank of America and Citigroup to see their net income plunge 58 percent and 46 percent year-over-year, respectively.

Regional banks stumble
Regional banks have also been facing challenges, as both PNC Financial Services Group and SunTrust Banks elaborated on their difficulties when they reported their fourth-quarter figures earlier this month, according to American Banker. While strengthening economic conditions helped drive loan demand at these companies, low interest rates crimped earnings.

Amid these trends, banks are scrambling to increase their fee revenue and reduce their expenses, American Banker reported. Scott Siefers, an analyst at Sandler O'Neill, commented on these continued trends.

"I think we are going to see a lot of the same in 2015, including continued cost-control efforts," he told American Banker. "The two differences are that the economy seems to be on stronger footing, but living off reserve-releases seems to be ending."

What banks can do
In this challenging earnings environment, many banks are turning to loan purchases - either on a bulk or flow basis - to supplement organic growth and enhance interest income. If financial institutions want to increase the chances of participating in a transaction that helps them achieve their business objectives, they can work with Garnet Capital Advisors, a loan sale advisory firm with substantial industry experience spanning many different debt types.