Why Big Banks Are Still Reporting Huge Profits (and What You Can Do)

Revenue doesn't just materialize out of thin air: people provide it. So, if you don't like the way a bank does business, don't do business with them at all, and don't limit your message to your checking account.
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Everyone seems to be talking about Bank of America's new fees (including us). Many other big banks, including Chase, Wells Fargo and Citibank, are also charging new fees for checking accounts, or planning to add them soon. Inspired by national movements like Bank Transfer Day, customers are threatening to leave in droves for smaller banks and credit unions. Meanwhile, we've been learning that most big banks are doing just fine in the profit department. Are people failing to make good on their threats to leave? Unfortunately, the answer doesn't matter too much right now, at least as far as bank profits are concerned. Big banks are big because they have many ways to make money. Your checking account is one small piece of the pie, and it had very little to do with this quarter's profit margins.

Banks doing okay despite the dismal market
Most market analysts weren't expecting the big banks to do as well as they did this quarter. As Daniel Indiviglio of The Atlantic wisely points out, banks are tackling an increasing number of profit-making obstacles. In the third quarter of 2011, the S&P 500 was down 17%. Unemployment stayed stuck at 9.1%, consumer confidence hovered at a 29-month low, and the U.S. credit rating was downgraded.

Additionally, big banks are still dealing with an uncertain financial future. As the weak economy huffs and puffs along, they continue to face a barrage of ongoing mortgage lawsuits. There's also the new regulations from the Dodd-Frank Act to account for, and there may be more layoffs on the horizon. New York's comptroller is expecting another 10,000 layoffs, just on Wall Street alone, by the end of 2012.

In spite of all this, most of the big banks reported third quarter gains. You may have heard that Bank of America reported a $6.2 billion profit, despite handing over its spot as the number one bank in America to Chase, which had an overall quarterly gain of $4.26 billion. Citigroup had a quarterly gain of $4.8 billion, and Wells Fargo gained $4.1 billion. Even though these aren't big enough numbers to have investors jumping for joy, there are certainly worse problems to have.

Investment profits are down, lending and credit boosts make up for it
It's a bad time to be an investor. Investment banking, trading and private-equity revenue was pretty weak across the board this quarter. For example, JPMorgan Chase's investment profits were down $900 million compared to last quarter, and its fixed income business was down nearly $2 billion from the first quarter. Additionally, Goldman Sachs, which is primarily an investment bank, actually posted a quarterly loss of $428 million, making them a notable exception to the "big banks are fine" analysis. However, this is only the second time they've ever reported a quarterly loss since going public in 1999. The $1.05 billion hit on their private equity investment in the Industrial and Commercial Bank of China may have had a greater impact than their domestic investments.

So how did anyone make money? It turns out lending was one of the best sources of revenue for banks in the third quarter. Ed Najarian, an analyst at International Strategy & Investment Group Inc., wrote in a message to Bloomberg that the 25 biggest U.S. banks experienced a 1.2% increase in total loans (commercial and residential). This was a particularly big factor for Chase, Wells Fargo and Citi's profits. Additionally, all these banks and Bank of America benefited greatly from a credit boost. Bank of America made most of their profits from an accounting gain, and pre-tax benefits from selling its stake in a Chinese bank. JP Morgan Chase and Citi saw a $1.9 billion gain on improved debt holdings.

If more customers switch banks, will it make a difference?
At the end of the day, that's the billion dollar question. While it may not have had a huge impact on profits this quarter, the fact of the matter is banks do care about their consumer credit revenue. As customers get fed up with higher fees and leave, it may affect their profit margins eventually. If you do want to switch banks, you voice won't go unheard. Just keep in mind that fighting any big business is like fighting a hydra: cut off one source of revenue, and two more may grow in its place. But revenue doesn't just materialize out of thin air: people provide it. So, if you don't like the way a bank does business, don't do business with them at all, and don't limit your message to your checking account. If you're considering a mortgage, a credit card, or an investment portfolio, check out the small banks and credit unions too.

When it comes to banking, put your money where your mouth is. That's the most effective form of protest.

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