The future of banking may not be on Wall Street
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It may be time for Wall Street banks to reconsider their traditional focus in favor of the less-glamorous world of consumer and commercial banking.
Several of the major banks reported shrinking profits from their typically strong investment-banking and fixed-income businesses this past quarter. But their consumer businesses did well, particularly in lending.
“I think the headline for the past earnings quarter was Wells Fargo,” notes Roy Smith, a professor at New York University’s Stern School of Business and a former general partner at Goldman Sachs Group Inc. “They seem to have their business model operating on all cylinders.”
San Francisco-based Wells Fargo & Co. WFC -0.55% reported a 14% increase in profit, despite experiencing weakness in mortgage refinancing. While it, too, granted plenty of mortgages that went bad, it has never been as focused on the core business of Wall Street as some rivals.
But Wall Street is no longer as lucrative as it once was, analysts say. Regulators and legislators have forced some big changes in the wake of the 2008 financial crisis. Those who say banks need to reconsider their business model say the costs of all those bankers and traders is too high compared to the revenue they are bringing in, even at some of the industry leaders.
To be sure, some analysts argue some of the weakness in the past quarter reflects the ebbs and flows of Wall Street, not a fundamental shift in profitability.
“Fixed-income and capital markets is the biggest pieces of the business across the board for many of the big banks,” said Todd Hagerman, analyst at Sterne Agee. “It represents 60 to 70% of revenue for these companies and it’s been the bread and butter for revenue going back decades.”
STUCK IN THE MUD
Smith, the former Goldman banker, said the industry still faces a number of headwinds, and many banks are struggling to make a fitting return on equity. While he thinks the business will eventually recover, Morgan Stanley, for one, is smart to be shifting its strategy more toward wealth management, he said.
Wall Street “has been stuck for a long time,” said Smith. He points to “the prolonged exposure to litigation that has been draining money away for some time and a much-increased regulatory burden.”
Indeed, Bank of America Corp. BAC -2.39% and J.P. Morgan Chase & Co. JPM -0.87% have paid some hefty fines to the government, and a report on Friday suggested Bank of America could face another $13 billion payment to settle claims with the federal government.
In the latest quarter, J. P. Morgan’s profits sank and Bank of America was hit with another massive litigation expense. Profit also fell at Goldman Sachs GS -1.62% , as its fixed-income revenue shrank and client activity remained subdued.
Citigroup Inc.’s C -1.20% profit rose, but the firm is still reeling from the Federal Reserve’s rejection of its capital plan and is facing problems with its Mexican unit Banamex.
“All Citi has done has diminished the bad bank,” said Smith. “They are still sticking with a business model that is very capital-intensive.”
SHEDDING ASSETS
In the wake of the financial crisis and big bailouts, legislators have added regulations and heavier capital requirements aimed at forcing banks to scale back risky behavior. As a result, banks are shedding businesses that are capital intensive and have lower returns.
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