As an aside, the Federal Reserve Bank of Boston published a brief on consumer de-leveraging in October 2012. The brief argues statistically that consumer de-leveraging hasn’t had a significant impact on consumer spending. In other words, people are paying off debt, but they aren’t cutting back on spending in order to do so. This might explain why some companies seem to be recovering just fine while banks lag behind. Consumers are spending in other industries, but what banks get are fewer loan revenues.
Again, unless the Fed allows interest rates to rise, Citi’s consumer-banking operations will languish.
Banks are getting desperate
Depository institutions aren’t the only ones feeling the pinch. A WSJ article recounts the fixed-income woes of investment bank Morgan Stanley (NYSE:MS). In 2012, fixed-income and commodities trading made up 22% of net revenue. Company leaders decided this year to lower revenue goals for Morgan Stanley’s fixed-income unit in order to focus on profitability. It’s about time. Last quarter’s ROE (return on equity) is sitting in the single-digits. And last year, Morgan Stanley watched 1.1% of the fixed-income market slip into competitors’ territory.
Another example is Bank of America Corp (NYSE:BAC). B of A, owner of Merrill Lynch, is stretching relationships in order to boost banking revenue. Q1 2013 saw consumer and business banking net income decrease 4% from the year-ago quarter. Since January, Bank of America has been pushing Merrill Lynch representatives to refer investment clients to Bank of America. Though the actual dollar results are still pending, it is widely believed that the cross-selling strategy hasn’t improved the already-strained relationship between the two firms. Too bad.
As mortgage rates slip and customers refinance, mortgage servicing and other paperwork gets expensive. Wells Fargo & Co (NYSE:WFC)’s solution is to outsource jobs to India. In June 2012, the company employed 3,000 people in India, with plans to send more jobs over there. WSJ reports that “This year, Indian outsourcing firms will bring in $316 million in mortgage work….” There is some concern that proper due diligence will be neglected, but interest rates aren’t very forgiving. Wells Fargo’s priority right now is cutting costs.
Conclusion
There you have it. Consumers are joyfully taking advantage of rock-bottom interest rates by paying off debt and refinancing their homes. The result is rough on banks. Interest rate spreads are squeezing banks so tightly that they have to perform all sorts of financial gymnastics in order to stay competitive. Banks led the way into the recession, and it looks like the other industries will have to yank banks out of it.
This article was written by Nathan Adamo and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned.
The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc (NYSE:C) , JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo.
The article Interest Rates Are Squeezing the Life Out of These Banks originally appeared on Fool.com.
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