Banks Challenged By Economy Despite Positive Earnings

It was a good quarter for most of the nation's big banks. Wells Fargo overtook JPMorgan to become "most profitable." And Bank of America showed its best results since 2007. A closer look, however, reveals some weaknesses that aren't apparent at first glance.

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Over the past week or so, most of the country's banks have reported their profits for the last quarter of 2013. The numbers, mostly, have better than most analysts expected. After a rough few years, most big financial institutions are faring pretty well. But there's some debate about how sustainable the numbers really are.

NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: The American banking sector may have survived the subprime mortgage crisis and the long slow recovery that followed it. But banking consultant Bert Ely says the economic environment is still a challenging one for many banks.

BERT ELY: While we are experiencing economic recovery, it is not a robust recovery and so loan growth in many areas is not as strong as many would like.

ZARROLI: The major banks have managed to survive and even prosper in part by diversifying their revenue streams. They may have taken a big hit during the financial crisis but big banks like Wells Fargo and Bank of America were able to make a lot of money more recently by trading bonds and other assets. Now, with the passage of new regulations like the Volcker rule, and the rise in interest rates, a lot of banks are cutting back on trading.

Daniel Marchon is an analyst at Raymond James and Associates.

DANIEL MARCHON: they saw that this was coming down, you know, at that point years to come, but they knew get out now, and that then when it's time for the final rules to be written, it won't be as much of a shock for our country and our businesses.

ZARROLI: In recent years, a lot of banks have been able to increase their profits by raising customer fees and closing branches. Bert Ely says banks also beefed up their profits in another way. They had set aside a lot of money to cover bad subprime loans, but Ely says as the economy improved, they've able to take that money out and add it to their balance sheets.

ELY: Problem with that is it's not sustainable. It doesn't last forever. Eventually, the piggy bank is empty.

ZARROLI: Ely says banks have been making profits through one-time-only measures that can't be repeated forever. The question now is how much more toothpaste can be squeezed out of the tube.

Bank analyst Richard Bove is pretty optimistic. Bove believes the last quarter of 2013 was a sort of turning point for the banks. He says the economy has finally improved enough that banks are beginning to make real money again.

RICHARD BOVE: When we get to 2014, there's every evidence that we will be switching from, you know, we'll say this questionable source of earnings to a more solid source of earnings.

ZARROLI: Bove says rising interest rates have dealt a big blow to the home refinancing business, which was a big source of profits for banks. But other categories of lending, including autos and mortgages and commercial loans, are showing signs of life again.

The lending outlook looks really good for 2014, and it's basically because we're seeing an improvement in the economy which carries through to banking.

Still, the U.S. economy remains far from robust and the banking sector continues to face headwinds. New regulations like the Dodd-Frank financial overhaul have, at least for now, reined in the ways that big banks do business.

The last round of earnings reports shows that banks have managed to keep earning money, but they sometimes had to resort to unconventional measures to do so.

Jim Zarroli, NPR News.

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