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AmericasMarch 6 2006

US top five are not showing impact of slowdown yet

On the surface, the latest annual results for the top five banks in the US seem to continue the trend established in previous years: strong pre-tax profit growth on the back of strong growth in consumer and commercial loans and good deposit growth.
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But how long will this last? There is evidence of a slowdown in consumer borrowing, pressure on the net interest margin has been developing throughout the year as interest rates have moved up, and in the fourth quarter there were increases in consumer credit charges related to a change in the bankruptcy legislation effective October 2005.

Pre-tax profit growth ranges from 7.2% for Wells Fargo to 96.3% for JPMorgan Chase (albeit the latter was from a depressed 2004 figure caused by litigation settlements and provisions). Of the three banks that run large trading businesses – Citigroup, Bank of America and JPMorgan Chase – the latter pair posted weak trading results in the fourth quarter of 2005. Citigroup fared better, showing lower volatility in trading results and improved investment banking performance. Pre-tax profit figures for Wells Fargo and Wachovia, whose main business thrust is in regional and community banking, were remarkably stable over the four quarters of 2005 with a lower degree of non-recurring gains and charges. Wachovia, in particular, has the benefit of exceptional asset quality.

Tier 1 capital growth was in single digits for all but Bank of America of our top five, which reflects the relative dearth of major acquisitions. Bank of America acquired MBNA in a deal that was completed on January 1, so the effect of this will not come through until first quarter results for 2006. Wells Fargo continued its policy of expansion through new branch openings and acquisition of small scale regional/community banks.

For the first time in some years, Citigroup did not make any major acquisitions and divested itself of some businesses that it now regards as non-core. The wind-down of its Japanese private banking business has also had an impact. This year, Citigroup may acquire a majority share in Guangdong Development Bank in China, although it would appear to face strong competition from a group led by Société Générale. The wisdom of taking on a bank with such a high level of non-performing loans is also questionable.

The initial 2005 figures for the top five banks show an increasing separation between the top three and the rest, with all three having Tier 1 capital in excess of $70bn and assets in excess of $1100bn compared with fourth placed Wells Fargo with Tier 1 capital of just under $30bn and assets of $482bn.

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