How the 10 Biggest Banks Make Money Now Might Surprise You

NEW YORK (TheStreet) -- Banks are still struggling to reinvent themselves six years after the financial crisis. But as banks prepare to post third quarter earnings -- with JPMorgan Chase (JPM) , Wells Fargo (WFC) and Citigroup (C) all reporting Tuesday -- it's surprising how some things haven't really changed.

Many banks still make money the old fashioned way: by gathering deposits and making loans, says Dick Bove, analyst with Rafferty Capital Markets.

Traditional banks also offer a series of business services which "basically means handling checks and credit card payments," Bove says. Some of them manage money, and the biggest banks especially Bank of America (BAC) , JPMorgan, Citigroup, Goldman Sachs (GS) and Morgan Stanley (MS) also trade and give investment banking "advice" to companies, which often means selling securities and other products in connections with acquisitions.

The loan volume in the third quarter was "reasonably good" according to Bove, driven mostly by commercial and industrial loans "which both reflected  the economy and  all of these leveraged loans being made on mergers and acquisitions," Bove says. Lending in credit cards, commercial real estate and autos was also good, he adds. Weak areas were one-to-four-family loans and home equity loans.

"Still, on balance they did better with loans. That's the most important factor and that's what drives their earnings," Bove says.

Banks "did a pretty good job in collecting deposits," effectively allowing them to borrow from consumers and corporations at rates below the rate the U.S. pays its creditors, holders of Treasury bonds.  

"Their margins were not great in the quarter, but they were okay. They did not run into any loan loss problems. Just the opposite. Loan losses are so low right now in the industry that banks are adding to earnings by reducing their loan loss reserves. And their cost of doing business, which soared over the last few years due to regulations, litigation, fines and the like seems to be flattening out and coming down," Bove says.

For the bigger banks involved in investment banking and trading, "investment banking brought in a lot of new business but most of it is going to get paid in the fourth quarter and the first quarter next year because there's a long lead cycle from announcing a merger to completing it."

However, IPOs and corporate bond sales have been strong, Bove says.

"Investment banking did well but it's going to do a lot better in the next few quarters. Trading  in the months of July and August was horrible. In September it started to come back. So trading looks like it's going to be weak but may not be as weak as people expect."

Here is how the 10 largest banks by assets get their revenues. The data comes largely from Bloomberg, though some is taken directly from corporate filings.

10. Capital One Financial (COF)

Capital One's credit card business contributed 60% of second-quarter revenues, with consumer banking adding another 30%. Ten percent came from the commercial banking unit.

Bove expects "surprisingly strong earnings," calling this "the one most likely to surprise on upside," among the 10 largest banks. The reason is that "people are using their credit cards again," and the bank has absorbed the cost of a couple of big mergers: ING Direct and Houshold Finance. 

Shares have gained 4.9% year to date, as of Friday's close. Analysts are looking for earnings of $1.95 per share on revenues of $5.56 billion.

9. PNC Financial (PNC)

Retail banking and residential mortgages accounted for roughly half of second-quarter revenues, with most of the balance coming from corporate and institutional banking. Asset management added about 8%, with PNC's stake in Blackrock adding another 6%.

"It basically makes its money by making loans," Bove says. "Its big challenge at the moment is they've made these acquisitions in the Southeastern U.S. and the Midwest and they are trying to increase their market share in those areas of the country." As a result they have "higher-than-desired expenses" from marketing as they try to increase market share.

Shares have gained 5.4% year to date. Analysts are looking for earnings of $1.70 per share on revenues of $3.78 billion.

8. US Bancorp (USB)  

Consumer banking delivered a third of second-quarter revenues at US Bancorp, with another quarter coming from helping businesses receive payments for credit card transactions. The rest came from making loans to businesses and helping them manage money.

The bank is "running out of revenue opportunities and it's become a major problem. So what the company is doing is crushing expenses."

Making loans to consumers and businesses is the main source of profits but also payment services: "getting the merchant their money when you hand a card to them. They handle ATM machines, custodial issues: a lot of the accounting that goes behind the average daily functions that banks are involved in," Bove says.

Shares have lost 0.82% year to date. Analysts are looking for earnings of $0.78 per share on revenues of $5 billion .

7. Bank of New York Mellon (BK)

Investment services -- providing clearing, custodial and other back-office services for large corporations and asset managers -- accounted for about 70% of second-quarter revenues for the bank. Investment management contributed the remaining 30%.

The bank's earnings are "basically tied to the activity in the markets and interest rates and unfortunately interest rates did not go up, so BNY Mellon is likely to have a lackluster quarter," Bove says. 

Shares have gained 5.6% year to date. Analysts are looking for earnings of $0.63 per share on revenues of $3.73 billion.

6. Morgan Stanley (MS)

Investment banking accounted for nearly half of second-quarter earnings, with the brokerage unit contributing most of the balance. Less than 10% came from more complex investment strategies for high-net-worth clients and institutions.

Under CEO James Gorman, who took over leadership in the wake of the crisis, the bank has focused increasingly on asset management, a safer business requiring less capital that institutional trading.

The bank is "doing a superb job. It is doing relatively well in trading. It is involved in most of the big investment banking deals. It has really good cost controls, so I would expect Morgan Stanley to beat earnings estimates and have a fairly decent quarter," Bove says.

Shares have gained 5% year to date. Analysts are looking for earnings of $0.54 per share on revenues of $8.16 billion.

5. Goldman Sachs (GS)

Goldman's trading division in stock, bonds, currencies and commodities generated more than any other division, just over 40% of revenues. Private equity, a unit that is being shrunk to meet new regulations, accounting for about a quarter of revenues. Investment bankers advising CEOs on transactions and sometimes facilitating the deals with derivatives trades brought in 20% of revenues, while investment management contributed about 15%.

Goldman's earnings are "difficult to figure out this quarter because it has been involved in a lot of investment banking transactions, but as I said, trading in July and August was terrible, so I would assume Goldman's earnings will be lackluster. But I assume they're going to beat the Street's estimates because I think the month of September was a significant uptick from August," Bove says.

Shares have gained 1.8% year to date. Analysts are looking for earnings of $3.20 per share on revenues of $7.77 billion.

4. Wells Fargo (WFC)

Retail banking accounted for nearly two-thirds of second-quarter revenues, while corporate banking contributing just over 25%. The balance, just over 15%, came from the bank's wealth management unit.

"Wells Fargo is a completely domestic bank. It does not want to do anything overseas. It is one of the best run banks in the U.S. It has tremendous penetration in both the real estate sector and the commercial sector," Bove says, adding it has done very well both controlling loan losses and generating new business through its capital markets subsidiaries. "Its only problem is dealing with the slowdown in housing," Bove adds.

Shares have gained 11.5% year to date. Analysts are looking for earnings of $1.02 per share on revenues of $21.1 billion.

3. Citigroup (C)

Citigroup got nearly half its revenues from global consumer banking. It is the only U.S. bank with a big international consumer business. Its corporate and investment bank accounted for slightly less than the consumer side, with a small contribution coming from Citi Holdings -- a "bad bank" Citigroup created after the crisis, containing assets in run-off mode or slated for sale.

Despite the strong consumer business, Bove says "Citigroup's main source of income is dealing with Fortune 500 companies all over the world." Citing economic and/or political trouble in Mexico, the Ukraine and Korea, Bove says of Citi, "It's involved in so many places in the world right now where there are significant problems that its very difficult to predict where their earnings might be."

Shares have dropped 3.8% year to date. Analysts are looking for earnings of $1.12 per share on revenues of $19 billion.

2. Bank of America (BAC)

Bank of America got a third of revenues from its consumer and small business banking division, with 20% each from trading, wealth management and corporate banking. The remainder came from collecting debts on troubled mortgages.

"The bank does an excellent job in investment banking. It's a reasonably good trader. It's the second-biggest retail bank in the U.S. in most loan categories, so it has multiple products. But I think its control of deposits and money in customer accounts is the true source of their profit," Bove says. 

As for the quarter, "Bank of America has always got litigation and reserve issues but their revenues were probably flat in the quarter. Their costs are coming down substantially ex-litigation and I think their quarter could actually be pretty good," Bove says.

Shares have gained 5.8% year to date. Analysts are looking for earnings of $0.32 per share on an adjusted basis on revenues of $21.35 billion.

1. JPMorgan Chase (JPM)

The bank got much of its revenues from retail banking last quarter, which includes credit cards, mortgages, ATMs and payment processing for small businesses. About a third of revenues came from the corporate and investment bank, of which fixed income trading was the biggest contributor. The balance came from asset management and commercial banking, which provides a wide range of services to midsized institutions.

"Investors look at JPM as a wholesale bank, but an enormous portion of the value comes from the large, stable and highly profitable... consumer business," wrote Oppenheimer analyst Chris Kotowski in a recent report.

JPMorgan shares have gained 0.07% year to date. Analysts are looking for earnings of $1.39 per share on revenues of $24.32 billion.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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