Banks Cut Jobs to Increase Profits

The Great Recession of 2008 was very hard on banks and their share prices. However, according to a recent report from the FDIC, banks are posting profits similar to 2007. The FDIC showed that during the second quarter banks had a net income of $34.5 billion; up from $5.9 billion in the second quarter of 2011. It is also important to mention that bank profits reached $35.2 billion in the third quarter of last year; the first time since the second quarter of 2007.

Before you run out to go buy bank shares, the numbers are not what they seem. Banks are posting high net income figures but most of that money is coming from layoffs, asset sales, etc. To make this simpler, back in 2007 banks had about 2.2 million full time employees. Today, there are over 100,000 less jobs in the industry as they battle to get to a more profitable state. Banks have also seen stepping up its loan loss reserve in the event that a loan defaults. Banks have accumulated $14.2 billion set aside for loan loss prevention as its sole purpose.

To be sure, there is some good news and not everything is all bad apples. Banks are much stronger than they were even a few years ago. Fighting to stay above water and balancing legal actions certainly can hurt your bank. Additionally, we have seen a very large shift to more basic bank functions such as loans, savings, etc from risky, speculative, derivatives trades.

That being said, Europe’s debt crisis definitely is help put a strain on US banks and their ability to get growth going. Once Europe is back on its feet, this will be a great day for the banks. Unfortunately, banks worries extend beyond Europe and into the US as well. Slow economic conditions, threats of new regulations, etc is not the ideal environment to see these financial institutions flourish.

Going forward, equities definitely face an uphill battle from here as the rally begins to breakdown in the wake of the US election, Fed easing, ECB action, jobs, etc. The market is looking for a reason to breakout but can not find one. Keep in mind that September is, historically, the worst month for stocks out of the year.

All of this uncertainty will definitely bring down bank shares as well. However, if you are trying to get into a bank investment, I would recommend one that has been showing its stability by focusing more on savings, loans, etc; rather than derivatives. Additionally, US banks look attractive because they are not a part of the Iranian money laundering scandal that has hit other European banks such as Barclays (BCS).

The bottom line here is that banks are doing much better overall than a few years ago. They now understand that basic bank operations such as savings and loans is vital to its recover, not risky trading. However, the future holds much uncertainty which could put pressure on bank shares. I recommend that you stay on the sidelines for now but have your shopping list ready, the sales are coming soon.

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