Big banks facing big drops in revenue are looking to Main Street to make up the difference.
Checking accounts, bank statements, even popping into your local bank branch could carry a hefty cost as the nation's mega-banks scramble to offset expected damage from the sweeping financial overhaul. The uncertain future has overshadowed otherwise strong second-quarter earnings at JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp.
All three companies beat expectations this week with profitable results. Yet their stocks tumbled, helping send the wider market sharply lower Friday.
The reason: Investors are worried about banks' future earning power after Thursday's passage of the most dramatic rewriting of banking rules since the Great Depression. Adding to the pessimism are falling trading profits — which all three banks mentioned in the their earnings reports — and weak U.S. loan demand.
The worries are well-founded. Bank of America said Friday it could lose up to $2.3 billion in annual revenue alone just from new restrictions on debt card "swipe" fees, or the money banks charge merchants who accept debit cards. All told, the bill's passage will reduce the value of Bank of America's lucrative credit card business by a staggering $7 billion to $10 billion.
"This is going to cause a significant reduction in revenue in the future," Bank of America CEO Brian Moynihan said of the restrictions after his bank reported a second-quarter profit of $2.78 billion, up 15 percent from a year ago.
The second-quarter results, driven by a sharp drop in losses from failed loans, would have given Bank of America's stock a nice bounce in the past. Instead, investors anxious about the future swiftly dumped the shares, which fell 9 percent.
Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley report earnings next week and are expected to see the same trend of declining loan losses but weaker revenue from trading and from financing stock and bond offerings. Analysts are also looking for estimates of the hit banks expect to take under the financial overhaul.
"The easy time of generating revenue will be restricted with regulations," said Alois Pirker, research director at Aite Group.
Yet banks are already moving to recoup any losses. One approach: making traditionally free services premium offerings. A Bank of America pilot program in Georgia, for instance, charges customers $8.95 a month to get paper statements or use bank tellers. The bank could start the program nationally as soon as next month.
Bank of America is also considering raising minimum balances on some accounts and charging customers who fall below it, Moynihan told analysts during a conference call.
Other banks are considering doing away with the once ubiquitous free checking accounts long used to lure new customers.
"Checking accounts are a potential source of income. That's the No. 1 thing that banks are looking at to recoup some of these costs," said Shannon Stemm, a financial services analyst with Edward Jones.
The changes reflect the new reality of the U.S. banking industry in the aftermath of the 2008 financial crisis. The overhaul approved by Congress on Thursday and soon to be signed into law by President Barack Obama tightens rules on everything from simple debit card transactions to the most complex securities.
Staying nimble and adjusting their business models accordingly is crucial for the big banks to stay competitive. And bank CEOs are making no apologies for the defensive moves.
"If you're a restaurant and you can't charge for the soda, you're going to charge more for the burger," JPMorgan Chase CEO Jamie Dimon said Thursday after his company reported a $4.8 billion second-quarter profit. "All these (regulations) will eventually get priced into the business."
While overdraft and other types of fees became overly "punitive" for some customers, other services have been a relative bargain and must be paid for through higher fees, Dimon said.
"A checking account ... costs us $300 a year. For that, you get ATMs, branches, debit cards, access to cash," Dimon said. "You get all of these. You have to charge for all that."
And new fees may only be the beginning. Big banks that cater to the masses may start offering more services to the wealthy — and thus command even higher fees — as well as scale back operational costs, analysts say. CreditSights analyst David Hendler said in a report Friday that Bank of America may have to eventually close up to a third of its 6,000 branches nationwide.
"We can see the same branch divestment/closure dynamics for a host of large-scale national bank branch networks," Hendler wrote, mentioning JPMorgan, Wells Fargo, Citigroup and USBancorp as banks that may have to make cuts.
But banks won't have free rein to raise fees on whatever they choose. The financial overhaul calls for the creation of a new Bureau of Consumer Financial Protection. The agency will have vast powers to enforce regulations covering mortgages, credit cards and other financial products to ensure customers are getting a fair deal.
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