Big banks' glory days: gone for good?
The summer of 2012 may be remembered as the time when regulation, scandals and a protracted slow-growth economy finally caught up with big American banks.
Ever since the financial crisis, US banks and their investors have held out hopes of a return to the good times, when lending profits steadily rose and commercial and investment banking flourished together. But analysts and investors are now questioning whether things have changed for good.
"My gut says all these megabanks are worth more separately than combined," said Bill Black, managing partner of Consector Capital, a hedge fund that focuses on bank trading. Smaller, more focused banks could attract investors, satisfy regulators and increase depressed stock prices, he said.
Seven of the 10 biggest US banks beat analysts' average earnings expectations in the second quarter. But much of that came from cutting costs and dipping into money previously set aside to offset bad loans, rather than from growth in their main businesses, which is what investors want to see.
Revenue from lending, trading and advising corporate clients on mergers is still weak, and low interest rates continue to squeeze profits on loans and other investments. Banks and their already depressed stocks appear headed for a long, grim future.
Nancy Bush, who has been a bank analyst and investor for three decades, said she is ready to throw in the towel on banks of all sizes.
"What's left at this point, barring a really significant improvement to the economy and a miraculous ramp-up in lending?" Bush asked. "Why invest in these companies? Somebody, give me a reason to believe."
Toughing out a cyclical economic downturn with more job cuts is not a long-term answer, some banking experts say. Today's problems derive from structural changes in the financial sector, including increased regulation, and demand a radical restructuring.
"The bottom line is that they have to get smaller so they can manage better," said Roy Smith, a finance professor at New York University's Stern School of Business. "They have to give up the idea of being a universal bank holding company that jams together businesses that have nothing to do with each other."