Wednesday, January 23, 2008

Why A Rate Cut Won't Help, pt. V

From the WSJ:

The glum news from U.S. banks continued with steep declines in fourth-quarter profit at five large lenders, led by Bank of America Corp. and Wachovia Corp., while mortgage-related woes plunged regional bank National City Corp. to a steep loss.


The results capped a miserable earnings season for the banking industry, which was riding high until the mortgage meltdown triggered huge write-downs on investments, forced banks to begin hastily rebuilding loan-loss reserves, and exposed how far many lenders strayed from their roots during the housing boom. "It is back to basics," Bank of America Chief Financial Officer Joe Price told analysts in a conference call yesterday.


Despite saving $500 million a year with the dividend cut, Jeff Kelly, National City's chief financial officer, said the Cleveland bank still is considering "a number of options for issuance this quarter."


At Regions Financial Corp., Birmingham, Ala., which has a major presence in Florida and other parts of the Southeast being clobbered by the housing downturn, profit tumbled 80%. KeyCorp, of Cleveland, reported an 83% profit decline. Fifth Third Bancorp of Cincinnati saw its fourth-quarter net income slide 39%. National City swung to a loss of $333 million, or 53 cents a share, from a year-earlier profit of $842 million, or $1.36 a share.

While all six banks said the performance of many businesses remains at least decent overall despite the weakening economy, deteriorating credit quality is causing loan-loss reserves to balloon in anticipation of further trouble. The six banks reported a combined loan-loss provision of $6.22 billion in the fourth quarter, up 181% from $2.21 billion a year earlier.

The financial sector is really sick right now. And it's not just one player -- it's everybody in the system. Loan loss reserves are increasing, banks are looking at ways to increase capital, writedowns are hammering earnings.

The underlying hope of a rate cut is it will encourage financial players to make new loans and thereby stimulate the economy. But what banks are looking to repair the damage of previously made poor lending decisions, making new loans is far from their minds.