Three of the four big U.S. banks have reported their third-quarter earnings, and the big story so far has been that accounting gains are boosting their bottom lines.
But the more important story centres on the other end of the income statement: revenue. Over the past two years, the top lines at Citigroup , JP Morgan Chase and Wells Fargo has barely moved. They can play with accounting gains all they want, but if their top lines don't grow, they're eventually going to run out of ways to re-jig their earnings.
Dating back to 2009, these banks' quarterly earnings have shown almost no trend. They've flatlined. Looking at earnings over the last twelve months at each quarterly reporting date, Citi has averaged about $80-billion for the last two years (or about $20-billion per quarter over the last twelve months). JP Morgan's growth is also flat, though it's at least generating more revenue, with a LTM average of about $100-billion each quarter.
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Wells Fargo, on the other hand, is actually seeing its top line trend down. In 2010 it had a LTM average of about $87-billion each quarter. That's fallen to $81-billion.
On of that, revenue prospects aren't promising. All their exotic business lines are being curtailed by Dodd-Frank, and core business lending isn't expected to ramp up any time soon, because even the Fed expects weak economic growth for the next two years.
That's why the banks rely on accounting gains, like debt valuation adjustments. Yet once credit spreads move the other way, these adjustments will come back to haunt.