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Banks are winning, we are losing, but that’s okay

October 15, 2014, 2:34 PM UTC
JPMorgan Profit Rises 76% As Bad Loans Dwindle
A man uses a cell phone outside the JPMorgan Chase & Co. headquarters on Park Avenue in New York, U.S. on Thursday, July 15, 2010. JPMorgan, the second-biggest U.S. bank by assets, said profit rose 76 percent, bouyed by a $6.3 billion reduction in provisions for soured mortgages and credit-card loans from last year. Photographer: Jonathan Fickies/Bloomberg via Getty Images
Photograph by Jonathan Fickies — Bloomberg via Getty Images

We have finally reached a place where it’s okay to cheer big bank earnings.

On Tuesday, Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) all reported earnings for the third quarter that were up from a year ago. Earnings at Bank of America (BAC) also came in on Wednesday better than expected. The big profits—a collective $19.1 billion, excluding a one-time legal charge for B of A, for just four firms for just three months of work—seem like huge hauls for companies that were supposedly reined in by Dodd-Frank and other post financial crisis regulation. What’s more, the market just hit its first rough patch in a little more than a year-and-a-half. So big profits for the big banks right now may seem like another tale of Wall Street getting the best of us and the economy.

But take a deeper dive into the numbers and it becomes clear that six years after the financial crisis, our nation’s banks are starting to function as they should, and we want them to.

First of all, banks are making their money in lending again. Lending at all three banks was up from a year ago. And lending is now these banks’ most profitable divisions. At JPMorgan, for instance, lending operations produced a return of 33%. That is more than double the return JPMorgan got from its investment banking and trading businesses, which generated a return of just 10% in the quarter, down from 17% a year ago. This is what we want. A system where banks have more incentive to lend than to trade or do other less productive stuff.

Second, the big banks are finally showing signs of slimming down. Along with bringing in greater profits, Citigroup announced that it was scaling back its retail operations in 11 countries in Europe, Latin America, and Asia. This comes partially in response to the Federal Reserve’s criticism earlier this year that, because of its size, Citigroup didn’t have a handle on its risk. JPMorgan also announced that it had completed the sale of its commodities trading unit.

Also, bank profits are up, but they are not up by that much. And they are still not nearly as profitable as they once were. JPMorgan reported that it earned $5.6 billion, up from a loss of $380 million for the same period a year ago. That may seem like a big jump. But put aside legal settlements and one-time gains, and the bank’s profits are basically flat from a year ago. JPMorgan’s earnings, despite the reported jump, were actually lower than what most analysts expected. Wells Fargo’s earnings were in line with what Wall Street’s analysts had predicted, and Citigroup’s profits were slightly better than expected.

Before the financial crisis, banks used to consistently report a return on their equity in the double digits, usually around 20%. No more. Citi’s return on equity in the third quarter was 6.5%. JPMorgan’s ROE was 10%. Wells Fargo has the highest ROE of the group at 13%, but that bank has traditionally made the bulk of its money from plain vanilla lending, so that’s what you want.

But perhaps the best sign that the banks have changed is their recent stock prices. Despite the recent panic about a potential global slowdown and the swoon in the equities market, bank stocks have barely budged. That’s the best indication yet that a few rounds of stress testing and increased capital requirements appear to be making banks safer than they used to be. Shares of Citigoup, once seen as the weakest of the big banks, have fallen by just over 1% in the past month, far less than the rest of the market. JPMorgan’s shares are down 3% in the past month. Back in late 2011—the last time the market was nervous about Europe, as it appears to be now—bank stocks were among the worst hit and there were rumors that Morgan Stanley was in trouble. These days, investors are more worried about the market and the economy than the banks.

Big banks still have plenty of room for improvement. While lending is up at JPMorgan, it’s still not rising as fast as the deposits that are coming in the door. And all of the big banks, and JPMorgan in particular, are still likely too big to fail.

Nevertheless, our nation’s banks are closer to what we want them to be: to be the shelter from our financial storms, not the catalysts for a new one.