The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to get rid of risky loans, while regional banks, most less than 1/10 the size of JPMorgan, are adding customers. That could mean lower earnings and profitability for the largest banks.
Citigroup, the nation's third-largest lender by assets, and Bank of America reported the biggest drops. Total loans at Citigroup fell 10% to $648 billion in the two year period, while those at BOA dropped 7.6% to $902.3 billion. Loans decreased 1.9% to $766.5 billion at Wells Fargo. JPMorgan, the largest U.S. bank, was the only big bank to show increase, which was a modest 1%.
These four banks held 41% of the $7.41 trillion in loans reported by the Federal Deposit Insurance Corp. (FDIC) at the end of the first quarter, compared with 43% as of the end of March 2010, when the total was $7.5 trillion. The four banks are facing a surcharge on top of capital requirements adopted last year by the Basel Committee on Banking Supervision that will be phased in by 2019. The need to hold more capital is leading some banks to reduce loans.
Fed officials recently cut their estimates for 2012 gross domestic product growth in the U.S. by 0.5%, noting that the rate means that demand is too weak to achieve full employment by 2014. In May payrolls climbed less than the most pessimistic forecast in a Bloomberg News survey and the unemployment rate rose from 8.1% to 8.2%.
Bank of America has sold more than $50 billion in assets to boost capital and simplify since 2010. BOA has scaled back in credit card and home lending, businesses that caused more than $50 billion in losses and impairments since the financial crisis, as it focuses on the most profitable customers and cuts assets that regulators deem risky. BOA's 8% decline in outstanding card loans to $112.6 billion in 2011 was the biggest among top U.S. issuers according to Nilson Report. It went from being the largest U.S. home lender after the 2008 takeover of Countrywide, with almost 25% of the market, to number 4 with 4.2% as of March 31st according to Inside Mortgage Finance.
Citigroup has sold more than 60 businesses and reduced assets by at least $600 billion since 2008. It posted a 10% decline in credit card lending in North America and reduced loans in Citi Holdings, a division created for unwanted assets including toxic mortgages, by more than half.
The largest banks have been cutting home equity and credit card loans since 2010. JPMorgan cut total consumer loans, which includes credit cards, mortgages, and auto lending, by 14% to $430.1 billion since the first quarter of 2010. Wells Fargo's consumer loans, including mortgage and credit cards, have fallen 7.8% to $420.8 billion in the same period.
This all has created an opportunity for regional banks, which have increased credit card and other consumer loans. U.S. Bancorp, Fifth Third Bancorp, and BB&T Corp. have boosted residential mortgage loans since the first quarter of 2010. US Bank, the 7th largest U.S. lender by assets, had $38.4 billion in mortgage loans at the end of the first quarter, 45% more than in 2010, while Fifth Third's portfolio rose 36% to $12.5 million. BB&T's residential mortgage loans rose 39% to $21.5 billion.
Wells Fargo, JPMorgan and Citigroup have all increased commercial and corporate lending. Wells Fargo had $345.7 billion in commercial loans at the end of the first quarter, which was 16% higher than in the first quarter of 2010. Citigroup's corporate loans rose 42% to $228 billion during that time.
The biggest lenders are focusing on large transactions because they provide higher returns for the amount of effort. Corporate clients are now also more open to switching banks or adding a regional lender. Regional banks also increased lending through consolidation. Capital One, which is the 6th largest U.S. bank by deposits, has spent more than $28 billion on acquisitions since 2005. Its total loans have jumped 33% since the first quarter of 2010.
Regional and community banks are expanding total loans because their customers, including small businesses, are borrowing. The small businesses are more in need of loans right now. They do not have large stashes of cash. The large corporations are sitting on their money or are not borrowing.
Investors are also valuing regional lenders more than the four largest banks. The 17 smallest KBW Bank Index lenders had an average price-to-tangible-book value of 1.5 at the end of the first quarter, compared to a 1.2 average for the four biggest banks, according to Bloomberg data. BOA and Citigroup shares are both trading below tangible book, a measure of what investors are willing to pay for a firm's equity after removing intangible items such as goodwill and brnad names that would have little value if the company went out of business.
If you or your business are having trouble obtaining financing or are unable to keep up with your loans problems you may want to explore the option of filing bankruptcy. Filing bankruptcy can free up your payments to unsecured creditors for other needs and it can discharge your unsecured loans. If you are considering filing bankruptcy in Kansas or Missouri please call or email me to schedule your free initial consultation. Please leave any questions or comments below.
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