The Big Banks Are Hurting

If you've walked into your local Bank recently, looking for a large, long-term loan, like a mortgage, chances are you've come away disappointed. Either the terms or conditions of the loans differed from what you expected.

We know, for instance, that the interest rate on mortgages is double what they were at the beginning of the year: and many large corporations see similar hikes in the interest charge for their inventory and capital loans.

What's more, the Bank may ask for additional collateral or proof of income. Something that you have yet to face in applying for prior loans.

There is a reason for all this; your Bank is getting hammered. Yesterday, as you know, the second iteration of the Nation's GDP was released. And it's in this second revised edition that we first get a look at Corporate Profits.

Typically corporate profits are a pretty homogeneous group, with companies rising or falling together. What's good or bad for one is good or bad for all.

But not this quarter. This quarter, the third quarter, saw one group report particularly dismal results: the large Commercial Banks.

These are the most capable banks in our financial system, which can provide loans, checking, and savings account for individuals like you and me. And they can also write multi-million dollar loans and financing for the largest companies in the nation.

But these are troubling times for the Banks. Those of you with a keen eye saw this last month when the big four Banks reported their results. Bank of America said its earnings declined by 5% in the third quarter. Not good, but as it turns out, the best of the bunch. JP Morgan Chase saw earnings drop by 18%, Citigroup down 27%, and troubled Wells Fargo saw its profits decline by a staggering 32%.

Put these all together, add in another two dozen or so central banks that are also suffering, and you have a banking sector where profits declined by a nearly unbelievable 2/3rds. Indeed the worst performance since the pandemic and a clear indication that the overall economy is on borrowed time.

You see, this is an economy that operates on credit.

My favorite example of how effective credit can be in capitalizing a company is Home Depot. Rightfully considered one of the best retail companies in the nation, it's also one of the most highly leveraged. They are using credit for nearly every capital function. That Home Depot inventory you walk through, inventory loans make it possible. The building you shop at is likely leased. Even the shareholders of Home Depot become obsolete, as the company uses a stock buyback program to substitute long-term debt to replace investors.

And Home Depot is far from alone in these practices. The entire retail sector of the economy and many other sectors operate this way.

Or, at least, they did operate that way until they ran into their banker recently. Like anyone applying for a loan currently, they're finding their usually friendly banker isn't so helpful anymore as banks stiffen their lending requirements.

There is one noticeable exception to this, and that is the credit card sector. You're probably getting all those credit card applications in the mail. There isn't a day that goes by without me getting at least 2 or 3 credit card applications. All are asking me to open a new card with the, at a very desirable interest rate. It is a practice that we've seen the banks do in each of the last recessions.

Just a word of caution. Read the fine print carefully, especially regarding any upfront fees or later "normal" interest rates. A zero-interest rate credit card, with a 5% upfront transfer fee and a 24% annual rate after the grace period, is no bargain. But it is the highest form of income that any bank can achieve.

Overall, in the Corporate Profits section of the GDP Report, there was only one decidedly negative group: the money-centered, national banks. Bank profits last quarter were down by two-thirds.

This profit decline indicates that the significant Banks are having difficulty keeping up with the Federal Reserve's interest rate hikes. As interest rates climb, so too does the Bank's cost of funds. The Federal Funds Rate is the principal measure of the Bank's cost of funds. A rate that began the year at near zero and today is over 3.8%.

For any bank needing to borrow funds from the Federal Reserve, their cost on a million-dollar loan went from an annual rate of $8,000 to an annual rate of $38,000.

More than enough to make any banker grumpy and make them think twice about making any new loan.

Our entire financial system rides on credit. Currently, the banks are caught between customers needing more credit and a Federal Reserve wanting to shut down credit.

Right now, I'm afraid it's not much fun being a banker.

Econ Briefs

Manufacturing, the process of taking raw materials and producing a finished product, is rapidly fading in the West. Fear of pollution and its subsequent environmental impact has forced many industries to consider relocating away from Europe and the US. It's especially true this year, as skyrocketing energy costs, especially in Europe, have made it almost impossible for manufacturing plants to operate at a profit.

And we're seeing this reality show up in the MACRO numbers. This morning Spain, Italy, France, and Germany have all reported that the Purchasing Managers for Manufacturing have all cut back to much lower levels, indicating severe manufacturing contraction on the European Continent. Europe joins the US, which has already cut back on future manufacturing purchases.

Today's numbers indicated that we're headed into a manufacturing recession throughout the collective West.

However, this is in stark contrast to Russian Manufacturing. Where Purchasing Managers are gearing up big time, it looks like Russia is headed into a mini manufacturing boom.

Later this morning, we will get the latest reading on Personal Income and Spending, which is always a good indicator of the future health of the consumer.