Several of the largest banks also outlined new efforts to cut costs and make more efficient use of capital, in their fourth-quarter earnings announcements:
  • Citigroup (C) announced several moves to lower its expenses by $900 million during 2013, with cost savings increasing to $1.1 billion 2014, at the relatively meager cost of $300 million in annual revenue. The moves included the closure of 84 branches and the elimination of 11,000 positions, and new CEO Michael Corbat said all the right things during the company's fourth-quarter earnings conference call, including the company's need to "get to a point where we stop destroying our shareholders' capital, and the need to "run a smart and efficient business that's good at its allocation of its resources."
  • Morgan Stanley (MS) said it had already met its goal to reduce its fixed-income risk-weighted assets to $280 billion from $390 billion at the end of the third quarter of 2011, and was on track to lower the RWA to $255 billion by the end of 2013, and eventually to less than $200 billion by the end of 2014. The company also said it would accelerate its purchase of the remaining stake in its brokerage joint venture with Citigroup, to complete the purchase by the end of 2013, when its agreement with Citi last year called for Morgan Stanley to complete the acquisition by 2015. Having 100% ownership of the brokerage will enable "greater order flow capture," increase deposit funding and lower expenses by eliminating the joint venture agreements and expenses, according to the company. Morgan Stanley in 2012 reduced its work force by 7% and said it planned to cut staffing by another 10% in 2013.
  • Bank of America (BAC) said that its fourth-quarter noninterest expenses declined 6% year-over-year, and that it had reduced its staff levels by 1% sequentially and 5% year-over-year. The company's deals earlier this month to sell servicing rights on roughly $300 billion in mortgage loans will also help to lower its legacy assets servicing (LAS) expenses by $1 billion during 2013.

Kotowski said that the big banks' cost savings "are still aspirational as opposed to realized," but that the "aspirations now seem to be more grounded given the stable and predictable performance in 2012. Thus, they have more credibility now than they did at any other time in the recent past when everything always seemed to be in flux."

Net Interest Income Bottoms


For the eight banks covered in his report, including Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, Capital One ( COF), JPMorgan Chase ( JPM), U.S. Bancorp ( USB) and Wells Fargo ( WFC), Kotowski said that fourth-quarter net interest income "ticked up by 1.3% linked quarter," and said that the sequential comparison was a "clean one," since the third and fourth quarters each had 92 days, an because Capital One's acquisition of HSBC's U.S. credit card portfolio was completed during the second quarter.

"Thus, the 1.3% NII growth seems mainly related to the 0.5% loan growth," Kotowski says, with non-real estate commercial and industrial lending being "the single biggest growth engine." January data from the Federal Reserve indicates a 4.8% year-over-year growth rate for C&I loans, although "the 'other consumer' category, which is dominated by auto lending and 'closed-end mortgages' (primarily jumbos) both started growing in January of 2012 and are now growing at 3.8% and 5.4%, respectively."

Fee Revenue


Kotowski said that during the fourth quarter, "fee income was clearly a bright spot, up 14.1% year over year," for the large-cap banks he covers, leaving out Goldman Sachs and Morgan Stanley.

For the group of six banks, investment banking fees were up 56% year-over-year, to $4.341 billion in the fourth quarter, while mortgage banking fees were up 31% year-over-year, to $7.214 billion. JPMorgan saw the most growth in mortgage banking revenue, rising to $2.035 billion in the fourth quarter, from $725 million a year earlier. Bank of America saw its mortgage revenue decline to $1.635 billion in the fourth quarter from $2.119 billion in the fourth quarter of 2011, reflecting in part the company's long-running dispute with Fannie Mae ( FNMA), which has now been resolved.

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