Wells Fargo & Co (WFC), Citigroup Inc (C): A Mixed Blessing for Banks

Motley Fool analyst Matt Koppenheffer sits down with Rick Engdahl for a side-of-desk interview about banks. Are they really that hard to understand? Can the big banks be trusted? Join us for a discussion that sheds some light on banks from Citigroup Inc (NYSE:C) to Wells Fargo & Co (NYSE:WFC), as well as some of the smaller players.

Banks melted down in the crisis, then rebuilt; the next step is to achieve some forward motion. In this video segment, Matt explains how higher interest rates will be a pain point for banks in the short term, but are ultimately needed in order to increase demand for their services.

A full transcript follows the video.

Matt Koppenheffer: In terms of revenue, I think that’s sort of the next thing. What we looked at is we had 2008-2009, everybody melts down — or most everybody melts down — if you talk to Wells Fargo & Co (NYSE:WFC) they’ll say, “We weren’t even close,” but most everybody melts down.

Then from then, sort of until now — maybe a couple quarters before now — has been a rebuilding process. How did they rebuild the capital levels I’m talking about? How do we get the balance sheet safe again?

Now the next thing is, how do you propel the business forward? How do you grow loans? How do you build non-interest businesses? That’s been tricky. That’s been a tricky business, number one because the economy has been pretty sluggish, and number two because interest rates have been so low.

When I talk about half of the bank’s business is in the traditional core banking business — of taking deposits and lending them out — when you have the low interest rates the taking deposits, they don’t have to pay out very much on that. They pay barely anything on that. But that doesn’t move very much. That can’t move farther down, once you get near zero.

But what they collect on the loans, that has continued to move down, so the spread in between what they keep in profit, that continues to compress. That’s been a big headwind for banks.

When we think about the economy improving — that’s business activity improving, that’s unemployment going down — what we’ll have for the banks, and this is I think one of the key opportunities, it’s sort of a dual thing. Number one, there will be more demand for the loans they provide. That’s a good thing; they can bring more loans onto the books.