From the Wall Street Journal:
Profit Outlook Darkens for Big Banks
By DAVID REILLY and DAVID ENRICH
December 26, 2007; Page C1
For major banks, the next few years will be a return to a simpler and possibly less-profitable time.
The subprime crisis and ensuing credit crunch have thrown a wrench into the highly profitable bank business model: Make loans that are then sold off to investors while arranging corporate financing through off-balance-sheet vehicles that keep banks’ capital costs down.
Now, banks are holding on to more of the loans they make, as they did years ago. And the off-balance-sheet lending business is crippled. It isn’t clear how long this will last, or how the banking model might evolve in response to the current market crisis. What is clear is that some of the banks’ more profitable lines of business have been shut, either temporarily or permanently.
“Banks are going to have to think real hard about what their new business model is,” said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm. “It was a different world when they could just set up another [off-balance-sheet vehicle] and put this stuff out there. It gave them unlimited flexibility in balance-sheet management.”
The originate-and-sell business model “encouraged reckless lending” that triggered the current mortgage morass, Mr. Cassidy said. Keeping loans on banks’ books will help avoid future meltdowns that could torpedo years of profits.
Meantime, changes being wrought to the banking business model are quickly becoming apparent. Citigroup has seen the amount of loans and leases it holds in inventory — and doesn’t plan to sell to investors — increase to about $697 billion at the end of September, up about 9% over six months, according to data from IRA.
Banks are likely to make up for those lost fees by increasing the interest rates they charge on loans, Mr. Poulos added. But that will diminish companies’ ability to take on debt, which could hurt the wider economy.
“Lending is going to be tight for the next year or two,” said David Hendler, an analyst at CreditSights Inc.