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In a day of extraordinary action in the markets, perhaps the most noteworthy move yesterday was a 20% plunge in the share price of Bank of America. Despite rallying today, the bank, America’s largest by assets, has seen its shares lose around 30% of their value so far this month (and nearly 50% so far this year).

Bank of America now trades at a wince-inducing 32% of its book value. This puts it at the bottom of the price-to-book league table for domestic banks. But there are banks in Europe that trade at similar discounts; many of these remain part-nationalised (RBS, Dexia) or face severe sovereign-related stress (UniCredit, Alpha Bank). For Bank of America, a major mortgage lender, this is is not the best neighbourhood to be in.

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Today, Wells Fargo reported  record quarterly earnings of US$3.8bn, up nearly 50% on the same quarter last year. JPMorgan kicked off the reporting season last week with quarterly net profit growth of 67%. The country’s other banking giants—Bank of America, Citigroup and Goldman Sachs—shared less encouraging news, with first-quarter profits down on last year.

What all of these banks have in common, however, is falling revenues. From racy investment banks to retail-focused lenders, America’s largest banks are still shrinking. Releasing provisions and cutting costs can only go so far; a true recovery will begin when top lines start to grow again.

Level 3 assets at large American investment banks may have “bottomed out”, according to a new report by Moody’s. The stores of these illiquid, difficult-to-value assets often housed many of the most toxic securities that battered banks’ balance sheets during the credit crunch. Any decline in Level 3 assets is considered positive for banks’ credit profiles, Moody’s claims. (For previous coverage of Level 3 assets, click here.)

Somewhat ominously, the ratings agency adds that further falls in Level 3 inventories are unlikely. Although risky and illiquid, these securities feature “attractive yields and wide bid-offer spreads.” Under pressure to boost shareholder returns, it will be difficult for bankers to shun them completely.

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

Five billion dollars is a lot of money. Even for a bank of JPMorgan’s size, with some US$2trn in assets, its latest quarterly net income, US$4.8bn, represented a record haul for the group. It was also a 76% jump from earnings in the same quarter last year.

The announcement of the Wall Street giant’s second-quarter results, on July 15th, initially stunned the markets, which were expecting more modest earnings. But it didn’t take long for analysts and investors to pick through the financial statements and find reasons to be less impressed by the headline result. Subsequent earnings announcements from fellow financial heavyweights Bank of America and Citigroup, on July 16th, followed a similar pattern.

Read more at Financial Services Briefing: “Core concerns” (July 16th)

As in previous quarters, American investment banks continued their remarkable run of profitable trading days in the first quarter of this year. Bank of America, Citigroup, Goldman Sachs and JPMorgan recorded positive net trading revenues every day in the first three months of the year. Morgan Stanley, a laggard by comparison, lost money on only four days during the quarter. (Citigroup does not routinely report its daily trading results, but mentioned that it had no losing days in the first quarter.)

“Like peering through a grimy factory window, trading revenue histograms can provide a few clues as to what is happening down on opaque trading floors,” Moody’s writes in a recent commentary. Normally, a lack of negative trading days would be a positive sign of the “strength and diversification of customer franchises and risk management expertise,” Moody’s claims. But the stellar performance of banks’ trading operations is, perversely, becoming a risk as regulators and investors cast aspersions on the motives and methods that these market makers employ to generate bumper profits on their own accounts.

In purchasing a US$1.9bn portfolio of investments from Bank of America, AXA Private Equity closed “one of the largest secondary private equity transactions in history,” it said today. The deal came only a few days after the French group took over funds worth US$718m from Natixis in a similar “secondary” deal.

The market for secondary buyouts is a rare bright spot in the private equity industry. According to Preqin, a data provider, the value of such buyouts in the first quarter of this year, US$7bn, surpassed the total for the whole of 2009 (US$5.1bn). AXA’s deals will boost these totals, as will a raft of other secondary buyouts announced recently.

Private equity firms sell portfolios to each other at a discount, suggesting that the need to boost liquidity is as pressing as the search for returns. Thankfully for sellers, the average bid from secondary buyers was 72% of net asset value in the second half of last year, up from only 40% in the first half, according to the latest data from Cogent Partners, an investment bank. The price paid by AXA for Bank of America’s portfolio was not disclosed.

Facing limited opportunities to exit investments via stockmarket listings or sales to trade buyers, private equity firms are looking to each other for help (at a price). As The Economist put it recently, “if you are looking for a way out, don’t forget the way you came in.”

In a “noteworthy sign of returning liquidity to capital markets,” a report from Moody’s highlights a drop in Level 3 assets (L3) at the biggest American investment banks in 2009.

These assets cannot be valued easily because they are generally illiquid. Many of the credit boom’s newfangled financial instruments—subprime-linked securities, collateralised debt obligations and the like—were classified as L3 and marked to internal models when reporting their values on balance sheets. Subsequent write-downs of these assets called into question the judgment and competence of bank executives.

In general, creditors now prefer banks to hold less L3, with outright disposals preferable to transfers into the Level 2 or 1 categories. As a percentage of tangible common equity, cash L3 at five lenders with large investment-banking operations fell sharply in 2009; “good news for creditors,” according to Moody’s. (L3 derivative positions were excluded from the analysis due to inconsistent disclosure practices.)

Despite the decline as a share of equity, the absolute value of L3 at Bank of America and JPMorgan remained relatively flat in 2009. Bank of America reported the largest increase in value of L3 (US$9.4bn) in the sample, while JPMorgan was the only bank to disclose a net transfer into the L3 category. Morgan Stanley reported the largest absolute decline in L3, trimming its balance by some 38% during the year, largely through disposals.

For America’s biggest banks, the latest customer satisfaction survey from the University of Michigan makes for unpleasant reading. Although the overall level of satisfaction with banks has remained steady over the past 12 months, this is largely down to smaller banks and credit unions improving their scores. Individually, the country’s three largest banks—Bank of America, JPMorgan and Citigroup—have all seen their satisfaction scores fall. Wells Fargo is the only top-tier lender to record a higher score in the latest survey, which the poll’s administrators put down to its takeover of Wachovia, traditionally a strong performer when it came to customer service.

As regulators devise new rules to discourage financial institutions from holding risky assets and trading in exotic securities, large universal banks are scrambling to shore up the core consumer deposit, savings and loan services that are the focus of the University of Michigan’s survey. On this front, there is much work left to do.

When will the write-downs end? Analysts are feverishly at work on loan-loss models in hopes of finding out. Accrued Interest came up with a nifty shorthand for gauging loss reserves—plugging the details of loan exposures from big American banks’ latest quarterly results into the losses forecast by category by the Federal Reserve in its spring “stress test”. These forecasted losses are then compared with the write-downs and provisions already taken. “The Fed’s guess is as good as any, and the exercise should be illustrative of how close we are to the end of loan loss provisioning” the blog notes.

The chart compares the loan-loss coverage of Wells Fargo (green bars, representing write-downs and provisions) versus the upper and lower bounds for loss estimates for the Fed’s “baseline” (blue bars) and “adverse” scenarios (red bars). Under all but the most sanguine scenarios, more capital must be set aside to cushion against future losses. The same holds true for Bank of America and JPMorgan, with details in the full post.

WFC

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

JPMorgan Q309On Wednesday, JPMorgan Chase kicked off the third-quarter reporting season for big American banks. Its quarterly net profit of US$3.6bn was fuelled primarily by investment banking. Indeed, JPMorgan’s credit-card unit lost US$700m in the quarter, down from a profit of US$292m a year earlier. As non-performing loans rose to US$17bn, the bank built its loan loss reserve to more than US$30bn.

The pattern of bumper investment-bank business and weak consumer-facing services was repeated in the results for other banks—namely, Citigroup and Bank of America—later in the week.

Read more at Financial Services Briefing: “Shock absorbers” (October 14th)

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