The US stock market has bounced this morning on Vikram Pandit’s bullishness about how the first two months of the year went at Citi.
Justin Fox notes that it could be an indication of banks getting back to decent profitability in their core lending business, which had been increasingly used as a loss leader for fees (such as those charged for packaging and distributing collateralised debt obligations).
David Goldman quotes figures from the St Louis Federal Reserve that show the net interest margin on loans by US banks steadily falling in the period leading up to the credit bust. He concludes that:
The foolish investor community thought that fee business was less cyclical than lending and rewarded bank equity performance for this ruse.It’s time to go back to old-fashioned banking, if there are any banks left standing to do so.
This reminds me of the time when I started covering banking in 1992 when banks were hauling themselves out of the credit crisis before last. The moral that most UK and US banks drew then was that they should shift from relying on the net interest margin to fee-based businesses.
The logic at the time was that credit would always been cyclical and that fees would provide a steadier stream of revenues. That worked for 15 years or so – until it stopped working.
