Wells Fargo’s second-quarter return on equity, the highest of the six banks, was more than 12 percent. The figures for Citigroup, Bank of America, Goldman Sachs Group Inc. and Morgan Stanley were less than half of that. Those five banks had returns above 11 percent for six consecutive years last decade.
One reason returns have fallen is that regulators have said banks will have to maintain bigger capital cushions to protect against losses. Tangible common equity, a measure that ignores intangible assets such as goodwill, has doubled at the six banks since 2007. It was 7 percent of total assets on average in the second quarter, an increase of 88 percent over the five years.
Equity at U.S. banks was about 20 percent of assets a century ago, according to data compiled by the Fed.
Revenue also is being squeezed by low interest rates and the 2010 Dodd-Frank Act, which includes caps on debit-card fees that have cost the biggest U.S. lenders about $8 billion a year.
“The problem is you’re simultaneously reducing the amount of leverage in the system at the same time you’re limiting revenues for these larger banks,” said Keith Leggett, senior economist at the American Bankers Association, a Washington- based lobbying group.
The compression of net-interest margins is among the top reasons for declining revenue, according to Leggett. Banks had benefited after the Fed cut its federal funds target rate to almost zero in 2008, borrowing cheaply while collecting interest on existing loans. New loans at lower rates erode profit.
The “very low interest-rate environment that bailed these guys out was also a curse,” said Paul Miller, a bank analyst at FBR Capital Markets Corp. in Arlington, Virginia.
Miller, a former examiner for the Federal Reserve Bank of Philadelphia, said lenders also are facing mortgage putbacks. Fannie Mae and Freddie Mac have been reviewing soured loans for signs of faulty underwriting. The government-controlled firms asked banks to buy back mortgages with an unpaid principal balance of $18.9 billion in the first half of the year.
The banks have said they expect fewer loans to go bad, a forecast that helps them boost earnings.
JPMorgan’s consumer and community-banking unit, the one that sent out the cookies, includes a retail division that cut $555 million in the second quarter from an allowance covering future loan losses. That translates into a gain in pretax earnings. In the same period the previous year, the bank added about $1 billion to that sum, an addition treated as an expense.
The $1.55 billion swing was more than one-fifth of the company’s pretax income for the three months.
While Smith, the unit’s co-CEO, said the decline in the allowance is “a very good thing” because it shows the health of the firm’s portfolio, some analysts question the quality of earnings from reduced losses.
“It’s their money, but it’s not coming from operations,” said Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis. The gains are “definitely not sustainable,” she said, because there’s a limit to how far the reserves can decline.