Days of rapid growth and focus on trading are over for banks, analysts say

These executives head some of the nation's largest and most closely watched financial institutions.
Washington Post Staff Writer
Monday, November 29, 2010; 7:22 PM

Two years after benefiting from an extraordinary government bailout, banks are hitting a wall.

Revenues at big financial firms are down across the board and could continue stalling for years as new regulations kick in and consumers borrow vastly less than before.

"They've already seen their glory days," said Matthew McCormick, a banking analyst and portfolio manager at Bahl & Gaynor. "Revenue growth is anemic. You're seeing essentially a bunch of banks surviving, not prospering."

It's an unusual position for an industry used to delivering growth that far outpaces the rest of the economy.

The problems are somewhat hidden because large banks are set to deliver banner profits again this year, even as their revenues drop. Much of the latest earnings, however, were fueled by short-term measures that temporarily boosted banks' bottom lines, such as reducing the amount of money they are holding to protect themselves against losses from loans.

But the long-term outlook is murkier. Analysts say it will be hard for these banks to replicate the kind of sustained, gangbusters growth they've enjoyed in recent years.

The industry is bracing for a slew of new rules that could force them to alter the way they make money. The regulations are designed to limit risky trading and curb certain fees charged to consumers - the exact activities that banks have leaned on to deliver impressive numbers quarter after quarter.

"The regulations in play right now are fundamentally redefining the business models of the nation's banks," said Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics.

Signs of the slowdown are already emerging.

At J.P. Morgan Chase, net revenue slipped 15 percent in the most recent quarter compared with last year. Citigroup's revenues fell 10 percent, and Goldman Sachs's was down 28 percent. At Morgan Stanley, net revenues dropped 20 percent, while Bank of America's revenues were essentially flat, growing 2 percent in the latest quarter.

Commercial banks, such as Bank of America, have traditionally relied on lending to make money. But that model is also running into trouble as businesses and consumers shed debt amid the economic slowdown.

Consumer debt, excluding mortgages, has dropped nearly 6 percent, or $150 billion, from a peak of $2.56 trillion in 2008.

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