8/14/2019 Five Ways Banks Will Make Money in 2010

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Five Ways Banks Will Make Money in

2010

 NEW YORK (TheStreet) -- Wall Street will be parsing the final readings on how the banks came through the 2009 over the next few weeks with JPMorgan Chase(JPMQuote) kicking off the festivities with its fourth-quarter report on Friday.

The numbers aren't expected to be all that pretty with analysts forecasting losses for some big names, including Bank of America(JPM Quote), Citigroup(C Quote), andsequential declines in profits from third-quarter levels for most others. Still there's littleargument that substantial progress has been made in stabilizing the sector from where wewere at this time last year. Even if where we were last year continues to be rehashed, andthe shape of seemingly inevitable regulatory reform remains unclear.

 Now, instead of tending to mere survival, the banks will once again be chasing profits. Asof Jan. 11, analyst expectations were for financial components of the S&P 500 index toreport earnings growth of 172% for calendar 2010, according to data from Thomson Reuters, an increase from a view for growth of 72.5% on Oct. 1, prior to the third-quarter reporting season.

That's a pretty high bar, especially with the pace of economic recovery still in question.Here are five areas banks are poised to profit from this year:

1) CAPITAL MARKETS:

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Traders are still king as market conditions have improved dramatically. Tentative signs of an economic recovery have sent stocks up more than 70% from the downturn's low inMarch, and credit conditions have improved dramatically.

The cost of insuring against default on investment-grade bonds -- as measured by the

spread between credit default swaps on those vs. Treasury bills -- has dropped by morethan half, according to Markit. Even the relative cost of high-yield credit default swapshas declined roughly 40%.

The improvements have been led by greater activity, meaning that even if tradingmargins are thinner, the sheer volume has helped boost results. The first year of recoveryshould lead to growth in several sectors, especially as stimulus cash is distributed.

Analysts are issuing much more bullish calls for stocks, bonds, commodities, rates andforeign exchange, indicating that trading titans at major banks and hedge funds could winout again in 2010, assuming they're long in the right sectors and asset classes at the right

time.

2) INVESTMENT BANKING:

The M&A and IPO markets have heated up, more deals are getting done, and many firmsare going through restructuring, if not bankruptcy. Equity underwriting volumes also set arecord during the fourth quarter, as the market rallied and risk tolerance improved. Bank of America, Citigroup, and Wells Fargo (WFC Quote) raised over $50 billion in capital,reaping big fees for advisory firms. Sandler O'Neill estimates that debt underwriting alsoclimbed 32% from 2008, when the credit crisis was at its peak.

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That's not to mention the Kraft (KFT Quote)-Cadbury bidding war and CIT's (CITQuote) bankruptcy exit, along with hundreds of other, lower-profile companies clamoringfor advice from a smaller group of investment bank competitors.

Still, even without Bear Stearns, Lehman Brothers and Merrill Lynch as independent

entities, the playing field isn't so tiny - it's more global and more competitive. The big banks at the top of league tables like Goldman Sachs (GS Quote), JPMorgan, Morgan

Stanley (MS Quote) and Bank of America will have plenty of chances to exploit newrevenue opportunities in 2010, along with smaller boutiques like Lazard (LAZ Quote)and Evercore (EVR Quote), and foreign titans like Credit Suisse (CS Quote), Deutsche

Bank (DB Quote),RBS (RBS Quote), UBS (UBS Quote) and Barclays (BCS Quote).

3) FEES:

Consumers have complained for years about the cost and unfairness of hefty bank feesand inexplicable interest rate surges. Congress and regulators have taken action to crack down on what they characterized as predatory practices, but that doesn't mean fees will be gone. They'll just pop up in different places more frequently, at a smaller scale.

For instance, new consumer protection rules will largely do away with overdraft fees, andonly allow banks to raise rates on credit cards under certain circumstances. As a result,Bank of America, which has already changed certain fee practices to match expected policy, estimates it will take a revenue hit of $150 million to $200 million in the fourthquarter alone.

But reports have already begun to surface of banks adding fees to checking and savingsaccounts and loan servicing to make up for lost revenue. As investors continue to put

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money back into the market, investment advisory fees may also rise. Bank of AmericaCFO Joe Price (who is moving to head the company's consumer banking business at thestart of next month) recently said the firm is "assessing proactive strategies to...moreevenly balance our fee structure across our entire customer base."

While the new fees may not offset revenue losses on the old ones -- at least notimmediately -- they will remain an easy source of income.

4) RESIDENTIAL REAL ESTATE:

Housing was at the center of the economic and financial crises, but it may help drive bank profits on the industry's path forward.

Write-downs on residential mortgage assets remain elevated in some markets, but havealmost certainly peaked industry-wide. The Obama administration's housing recovery plan stirred a wave of refinancing that helped prop up bank results earlier in the year, anddrew consumers back into the housing market for new purchases as well.

Home sales have improved, and prices have shown some signs of stabilization. There'sless of a chance that borrowers with modified loans will default, even though the risk remains high with elevated unemployment.

Yet with the credit markets having defrosted, and the potential for more improvement inhousing and jobs in 2010, banks could start to see write-ups on once-toxic assets, as wellas a continued revenue stream from additional refinancings and home purchases.

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5) LENDING:

Banks aren't lending much, and haven't been for some time.

The industry held $6.7 trillion in loans and leases at the end of 2009, according to theFederal Reserve, down 6.9% from the same point a year earlier. The decline is because of a number of factors, including write-downs, weak demand, stricter underwriting

standards and hesitance to distribute precious capital until there is clarity on regulatorystandards.

Although bankers respond to lending critics by saying demand is down and that prudentstandards are a priority, there are still a fair number of consumers and businesses withdecent credit metrics who simply can't access the cash they need to move forward.Luckily for them, a combination of factors are going to make it incredibly difficult for  banks to keep hoarding cash in 2010.

The economy is predicted to grow 2% to 3% this year, as stimulus funds are distributedand the recovery takes hold. Banks will want to get in on those profits by extending

additional funds to fuel that growth. At the same time, interest rates are also expected torise, rendering the low-yielding assets that banks now hold much less attractive thaninterest income from loans. And as the Fed diminishes its role in the debt markets,someone will have to step in to take its place.

-- Written by Lauren Tara LaCapra in New York .