A Weak Economy Takes the Air Out of Bank Earnings

When the financial crisis hit and the economy swooned, Washington first focused on saving the banking industry. Two U.S. Treasury Secretaries and Federal Reserve Chairman Ben S. Bernanke funneled capital and cheap loans to banks with the goal of boosting lending and powering a robust economic revival. It hasn’t worked out that way. While those policies benefited Wall Street, they failed to produce a sustained recovery on Main Street, where the unemployment rate remains above 9 percent. Now a struggling U.S. economy may sap bank earnings and lead to industry job losses and lower stock prices. “The political class is fixated on how the banking system caused the problem in the first place and therefore how it will have to cure it in the future—that if you get the banks working again, the economy works,” says Robert B. Albertson, chief strategist at Sandler O’Neill & Partners in New York. “It drives me into silly laughter. It’s the other way around.”

The nation’s gross domestic product grew at a 1.3 percent annual rate in the second quarter and 0.4 percent in the first quarter, the Commerce Dept. reported July 29. Combined first-half earnings at the 15 largest U.S. banks by assets dropped 17 percent from a year earlier, led by declines at four of the six biggest. While the average estimates of analysts surveyed by Bloomberg show they still expect second-half earnings at the 15 lenders to climb 88 percent from the same period in 2010, some investors are dubious. “I don’t think economic reality has hit estimates yet,” says Matthew D. McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor who helps manage about $4 billion and doesn’t own any of the biggest U.S. bank stocks. “I’ve got to believe that this is going to be a tough quarter.”