Old Problems For Banks Remain
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Citi and Merrill are expected to announce another series of writedowns due to eroding values of mortgage-backed securities and leveraged loan portfolios. Other areas, like home equity loans, have shown increasing signs of deterioration too.
The question now is how bad do losses get? The numbers, in some cases, are really disastrous. To make matters worse, consumer spending has slowed and unemployment has increased - driving bigger losses in banks’ consumer-related businesses such as credit card, small business and even their commercial real estate portfolios. As a result, banks are having to set aside more money for potential loan losses.
Washington Mutual revealed on Tuesday that it had to set aside $3.5 billion in loan loss provisions and could be staring at a loss of $14 billion by year end.
The bad news isn’t limited to loan portfolios, either. When the Federal Reserve aggressively cut interest rates earlier this year, the expectation was the cuts would boost banks’ net interest margins, a key measure of the profit banks make from taking in deposits and lending them back out.
But competition for customers has been so tough that banks have been unable to cut their deposit rates as much as they would have in the past. At the same time, companies with sizeable investment banking divisions like Citigroup, JP Morgan and Merrill Lynch are expected to be hit by a slowdown in merger and initial public offering activity. Merger advisory and equity underwriting are two key sources of lucrative fees for investment banks.
