Banks Profit, Even in This Recession
July 21, 2009 by Miranda Marquit
Filed under Finance
It’s good to be a bank. Last year things were a bit dicey for banks as they saw millions and millions in losses due to mortgage defaults . And, even though credit card defaults are expected to be the next wave, banks are still doing reasonably well. Indeed, Goldman Sachs kicked off the most recent earnings season with profits in the billions, and other big banks, including JPMorgan Chase, are also reporting billions in profits.
But how are they doing so well in this time of recession ? Smart Money offers these 5 reasons that big banks are able to beat the recession and rake in the profits :
- Underwriting increases provide investment banks with more income as businesses go to investment banks. Banks that do the underwriting collect fees, and if they actually make the loans, they also collect the interest.
- Trading revenue is also up as investors try to play the market, getting in when prices are low and trading to take profits on the rallies. Many of the big banks (like Goldman) do over the counter trades, so they get commissions as well.
- Less competition is the result of failed banks and takeovers. This means a bigger piece of the pie for those banks that are left.
- Toxic assets have been working their way through the system. Additionally, some banks (like Goldman) had limited exposure to toxic assets to begin with.
- Retail banking has been providing a boost. People still need a place to keep their money. With a lower Fed funds rate, they can pay less in interest to their savings customers, while still charging between 5% and 10% interest (more for credit cards) on loans they make. That difference is resulting in profitability.
In the end, the banking industry is likely to be just fine . While some individual banks went down, and continue to struggle, the financial sector as a whole is doing okay, and is likely to recover from this recession without too much trouble. Hopefully, these profits mean that the banks will be more willing to help other companies that need access to credit .
Image source: Daylife
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