netrashetty
Netra Shetty
AMC Theatres (American Multi-Cinema), officially known as AMC Entertainment, Inc., is the second largest movie theater chain in North America with 5,325 screens[1] and one of the United States's four national cinema chains (Regal Entertainment Group, National Amusements, Inc. and Cinemark Theaters being the others) of the 12 largest on the continent that did not go bankrupt during the 2001-2002 recession,[2] due in part to the fact that its theatres often dominate lists of the top 50 most profitable theatres in North America.[3] Its mascot is the animated filmstrip Clip who has starred in the pre-show policy trailers from 1991 until a brief hiatus for most of 2009 until the autumn of 2009. While it also has locations in Canada, within the United Kingdom, France, and Hong Kong the chain is known as AMC Cinemas.[4][5][6] Within Spain the chain is known as AMC Cines.[7]
& Co. (NYSE: M) is one of the largest financial institutions in the United States. Its main services include the provision of credit cards and loans and other financial services to both commercial and individual customers in addition to the underwriting of new debt and equity issuance through itsinvestment banking division. In 2009, 's total net revenue amounted to $108.65 billion, a 49% increase from the previous year. The firm has a significant amount of international exposure, with operations in over 50 countries and clients in every major financial market in the world. [1]
Despite having sold $25B in preferred stock to the US Government through theTroubled Assets Relief Program (TARP) in October 2008, 's performance has been relatively strong thus far.[2] To avoid government interference and increased oversight, it was one of the first financial institutions to repay its TARP funds. It reported record revenues and positive earnings in 2Q2009, despite having incurred more than $25b for repaying its TARP funds, which included more than $800m in dividends for preferred stock. In addition, it reported a Tier 1 Capital Ratio of 9.7%, well above the 4% minimum outlined by the Fed to be considered adequately capitalized.[3]
reported fourth-quarter 2010 net income of $4.8 billion, an increase of 47% compared with $3.3 billion for the fourth quarter of 2009. Earnings per share were $1.12, compared with $0.74 for the fourth quarter of 2009. Full-year 2010 net income was $17.4 billion, an increase of 48% compared with $11.7 billion for the prior year. Earnings per share were $3.96, compared with $2.26 for 2009.[4]
Contents
• 1 Business Overview
o 1.1 Investment Banking (25.9%% of 2009 Net Revenue; 58.8% of 2009 Net Income)[5]
o 1.2 Retail Financial Services (30.1% of 2009 Net Revenue; 0.8% of 2009 Net Income)[5]
o 1.3 Credit Card Services (18.7% of 2009 Net Revenue; -19% of 2009 Net Income)[5]
o 1.4 Asset Management (7.3% of 2009 Net Revenue; 12.2% of 2009 Net Income)[5]
o 1.5 Treasury & Securities Services (6.8% of 2009 Net Revenue; 10.5% of 2009 Net Income)[5]
o 1.6 Commercial Banking (5.3% of 2009 Net Revenue; 10.8% of 2009 Net Income)[5]
o 1.7 Corporate/Private Equity (6% of Net Revenue; 25.8% of Net Income)[5]
• 2 Trends and Forces
o 2.1 Impact of Basel III Rules on Big Banks
o 2.2 Repayment of TARP
2.2.1 $25 Billion Bailout and Repayment
2.2.2 M Passes Stress Test
o 2.3 Acquisitions and Divestitures allow M to remain flexible
2.3.1 Bear Stearns Buyout and Washington Mutual
o 2.4 Downturn in US Economic Cycle
2.4.1 Interest Rates
2.4.2 Effects of housing market slowdown
o 2.5 Government Regulation
2.5.1 Obama's Bank Plan Restricts Banks' Profit Potential
2.5.2 Credit Card Regulation Costs Hundreds of Millions in Profit
2.5.3 Barring of Swaps Could Cost Banks $85 Billion in Capital
2.5.4 Changes in Corporate Tax Law Helps Investment Banking Fees
2.5.5 New Tax Bill Protects Bank's Foreign Profits
2.5.6 Fed Proposes New Legislation to Prevent Money Laundering
• 3 Competitors
• 4 References
Business Overview
Investment Banking (25.9%% of 2009 Net Revenue; 58.8% of 2009 Net Income)[5]
Investment banking is 's chief operation. The investment bank is employed by clients running the gamut from large corporations to governments to financial institutions. offers a wide range of financial services, including risk management, corporate advising, trading and market-making (enabling transactions between buyers and sellers of cash securities andderivatives), capital raising in equity and debt markets, and research. The investment bank is also responsible for investing and trading with the firm's own capital.
Both net revenue and net income increased in this segment in 2009 amounting to a 228% increase in net revenue to $28,109 million and a net income of $6,899 million over a $1,175 loss in the previous year.[5] The segment experienced significant returns over the previous year due to a 38% increase in global investment banking fees amounting to $1.9 billion in 2009, earning the company the #1 ranking for global investment fees and a 9.2% share of the market in 2009.[6] [7]
In the 4th quarter of 2010, net income was $1.5 billion, down 21% compared with the prior year and up 17% compared with the prior quarter. The decrease from the prior year reflected higher noninterest expense, partially offset by higher revenue and a higher benefit from the provision for credit losses; the increase from the prior quarter reflected higher revenue and a higher benefit from the provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $6.2 billion, compared with $4.9 billion in the prior year and $5.4 billion in the prior quarter. Investment banking fees were $1.8 billion, down 3% from the prior year and up 22% from the prior quarter; these consisted of equity underwriting fees of $489 million (down 11% from the prior year and up 47% from the prior quarter), debt underwriting fees of $920 million (up 26% from the prior year and 17% from the prior quarter) and advisory fees of $424 million (down 31% from the prior year and up 10% from the prior quarter). Fixed Income Markets and Equity Markets revenue totaled $4.0 billion, compared with $3.7 billion in the prior year and $4.3 billion in the prior quarter, reflecting solid client revenue. Credit Portfolio revenue was $377 million, primarily reflecting net interest income and fees on retained loans.[4]
Retail Financial Services (30.1% of 2009 Net Revenue; 0.8% of 2009 Net Income)[5]
has the third-largest deposit base in the U.S., and has the largest market share in large cities like Chicago and New York, with the acquisition of Bank of New York's operations. The firm also operates the third-largest ATM network in the United States and the nation's fourth-largest branch network. The segment acquired Washington Mutual for $1.9B from the Federal Deposit Insurance Corporation (FDIC) on Spetember 25, 2008 and completed integration of the firm in 2009. The segment maintained growth with the opening of 6 million new checking accounts in 2009.[6]
The division's net income fell substantially to $97 million in 2009 from $880 in 2008. This decrease was in part due to a net loss in Consumer Lending of $1.4 billion compared with a net loss of $416 million in the previous year. Total revenue in the division in 2009 decreased by 24% to $3.1 billion, reflecting lower MSR risk management results and higher repur reserves, partially offset by wider loan spreads. Credit costs also increased with a $1.5 billion increase in the allowance for loan losses due to a rise in predicted losses in auto, student, and business loans.[6]
In the 4th quarter of 2010, net income was $708 million, compared with a net loss of $399 million in the prior year. Net revenue was $8.5 billion, an increase of $856 million, or 11%, compared with the prior year. Net interest income was $4.8 billion, down by $241 million, or 5%, reflecting the impact of lower loan balances and narrower loan spreads, partially offset by an increase in deposit balances. Noninterest revenue was $3.7 billion, up by $1.1 billion, or 42%, as higher mortgage fees and related income were partially offset by lower deposit-related fees.[4]
Credit Card Services (18.7% of 2009 Net Revenue; -19% of 2009 Net Income)[5]
Card Services, 's credit card services business, is the second-largest domestic issuer of Mastercard (MA) and Visa (V) cards, with a total of 168 million of its cards in circulation. manages more than $190 billion in loans for customers ranging from individual consumers to small businesses. The business has grown naturally and through the acquisition of Washington Mutual's credit card operations. Card Services has recently focused on expanding its network of private-label cards, which are cards issued by a specific retailer and are accepted only by the issuing retailer. 's current partners include BP (BP), Circuit City (CC), and Kohl's (KSS). also issues cards jointly with various organizations, including Walt Disney Company (DIS), AARP, Marriott (MAR), Sony (SNE), and Amazon.com (AMZN). Private-label cards, while they offer better growth opportunities than traditional bank-issued cards, typically experience higher rates of delinquency, which adds additional risk to 's private-label expansion.
Credit Card services accounted for 18.7% of 2009 net revenue. Net income declined by 385% from the previous year due to a high credit costs of $4.2 billion driven by continued high levels of charge-offs and an addition of $400 million to the allowance for loan losses. The worsening economic condition has increased the likelihood of charge-offs and a higher delinquency rate.[6]
In the 4th quarter of 2010, net income was $1.3 billion, compared with a net loss of $306 million in the prior year. The improved results were driven by a lower provision for credit losses, partially offset by lower net revenue. Net revenue was $4.2 billion, a decrease of $902 million, or 18%, from the prior year. Net interest income was $3.4 billion, down by $869 million, or 20%. The decrease in net interest income was driven by lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases were offset partially by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $852 million, a decrease of $33 million, or 4%, due to lower revenue from fee-based products.[4]
Asset Management (7.3% of 2009 Net Revenue; 12.2% of 2009 Net Income)[5]
's asset management division provides retail investors, institutions, and high-net-worth individuals worldwide with investment and wealth management. The division's products and services include management of equities, hedge funds, real estate, fixed income, and private equity investments, as well as trust and estate services for its high-net-worth clients. Asset Management is the leader in asset management with over $1.5 trillion in investment and wealth management. In 2008, the segment's net profit and net revenue both fell. This was caused by lower performance fees from a weaker market overall. As whole, the weakening credit market hurt the segment's performance.[8]
In the 4th quarter of 2010, net income was $507 million, an increase of $83 million, or 20%, from the prior year. These results reflected higher net revenue and a lower provision for credit losses, largely offset by higher noninterest expense. Net revenue was a record $2.6 billion, an increase of $418 million, or 19%, from the prior year. Noninterest revenue was $2.2 billion, up by $409 million, or 22%, due to higher loan originations, net inflows to products with higher margins, the effect of higher market levels and higher performance fees. Net interest income was $381 million, up by $9 million, or 2%, due to higher deposit and loan balances, partially offset by narrower deposit and loan spreads.[4]
Treasury & Securities Services (6.8% of 2009 Net Revenue; 10.5% of 2009 Net Income)[5]
Treasury Services provides cash management, trading, and other services to corporations, financial institutions, and government entities. Securities Services holds, values, and clears securities, cash, and alternative investments for investors and broker-dealers, essentially facilitating transactions on stock markets across the world. In 2008, this division made record profits of $1.8B and a record net revenue of $8.1B on record net revenue of $6.9 billion. Increased usage of its products and services by clients, growth in the volume of electronic transactions, and larger loan balances all contributed to the segment's performance in 2008.[9]
In the 4th quarter of 2010, net income was $257 million, an increase of $20 million, or 8%, from the prior year. These results reflected higher net revenue, primarily offset by higher noninterest expense. Net income increased by $6 million, or 2%, compared with the prior quarter, including an increase in depositary receipts revenue reflecting seasonal activity.
Net revenue was $1.9 billion, an increase of $78 million, or 4%, from the prior year. Worldwide Securities Services net revenue was $960 million, an increase of $43 million, or 5%. The increase was driven by higher net interest income, market levels, and net inflows of assets under custody. Treasury Services net revenue was $953 million, an increase of $35 million, or 4%. The increase was driven by higher trade loan and card product volumes.[4]
Commercial Banking (5.3% of 2009 Net Revenue; 10.8% of 2009 Net Income)[5]
Commercial banking is a small but strong component of 's business, serving over 26,000 clients across the U.S. This division provides a range of banking services to corporations, government agencies, non-profits, and other financial institutions. Comprising only 5.3% of the firm's income, the commercial bank had earned record profits in both 2008 and 2007 with growth maintained in 2009. The segment added $44.5B in loans from the acquisition of Washington Mutual and $2.3B in loans and $1.2B in deposits from the acquisition of The Bank of New York in 2008.[10] Net income amounted to $1,271 million in 2009, a 12% decrease over the previous year due to higher credit costs and increased expenses from higher performance based compensation, and FDIC insurance premiums.[6]
In the 4th quarter of 2010, Net income was $530 million, an increase of $306 million, or 137%, from the prior year. The increase was driven by a reduction in the provision for credit losses and higher net revenue.
Net revenue was a record $1.6 billion, up by $205 million, or 15%, compared with the prior year. Net interest income was $1.0 billion, up by $61 million, or 6%, driven by growth in liability balances and wider loan spreads, partially offset by spread compression on liability products and lower loan balances. Noninterest revenue was $607 million, an increase of $144 million, or 31%, driven by net gains on sales of loans and other real estate owned, increased community development investment-related revenue and higher investment banking fees.[4]
Corporate/Private Equity (6% of Net Revenue; 25.8% of Net Income)[5]
's Corporate/Private Equity division, J.P. Partners, LLC offers fund administration services to private equity funds, institutional limited partners, real estate funds, infrastructure funds, funds of private equity funds, distressed debt and hybrid funds. It currently provides administration services to more than $200 billion in alternative assets. The firm's income from Corporate/Private Equity services amounted to $11,728 million in 2009, constituting 25.8% of total net income and an increase of 209% from $5,605 million in 2008.[5] In 2009, was ranked as top provider of private equity fund administration, according to a key industry survey by Global Custodian magazine. It received best-in-class recognition across 54 service categories, securing more top ratings than any other administrator.[11]
In the 4th quarter of 2010, Net income was $29 million, compared with net income of $1.2 billion in the prior year. Private Equity net income was $178 million, compared with $141 million in the prior year. Net revenue was $355 million, an increase of $59 million, driven by higher private equity gains. Noninterest expense was $77 million, an increase of $1 million from the prior year.
Corporate reported a net loss of $149 million, compared with net income of $1.1 billion in the prior year. Net revenue was $1.3 billion, including $1.2 billion of securities gains. Noninterest expense reflected an increase of $1.5 billion for litigation reserves, predominantly for mortgage-related matters.[4]
Income Statement $M [12]
2005 2006 2007 2008[13]
2009[5]
Non-interest Revenue ($M) 34,693 40,757 44,966 28,473 49,282
Net Interest Income ($M) 19,555 21,242 26,406 38,779 51,152
Total Net Revenue ($M) 54,248 61,999 71,371 67,252 100,434
Total Net Income ($M) 8,483 14,444 15,365 5,605 11,728
Trends and Forces
Impact of Basel III Rules on Big Banks
The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults.
Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets.
The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as Stanley, Goldman Sachs Group (GS), J P (M), and Citigroup (C) will not see their businesses change with the passing of these rules.
Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.
The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.[14]
Repayment of TARP
$25 Billion Bailout and Repayment
In June 2009, announced that it had received permission to repay the $25b in TARP funds it had received from the government. It was one of the first financial institutions allowed to repay TARP funds because of its strong financial position, as well as its fulfillment of the conditions outlined by the Fed. This includes the passing grade that M got on the Stress Test in May.
The repayment of the TARP funds has cost M more than the $25b loan. It incurred a near $800m payment to the U.S. Treasury in dividends on the preferred stock it purd, a non-cash $1.1b charge against its second quarter results, and a future payment to repur a 10 year warrant.[15][16] Although M incurred a $1.1b charge in 2Q 2009, it still reported positive earnings of $2.7b and record revenues of $27.7b.[3] In addition, it reported a Tier 1 Capital Ratio of 9.7%, which is well above the 4% minimum to be "adequately capitalized."[3] The Fed used the Tier 1 Capital Ratio as a measure for the Stress Test it conducted in February 2009.
M Passes Stress Test
In February, Secretary of Treasury Timothy Geithner announced that banks with more than $100 billion in assets will be required to participate in a "stress test" -- a series of financial assessments to determine the health of the bank and if the bank needs additional capital.[17] passed the Stress Test and was not required to raise additional capital. However, ten of its competitors had to raise approximately $175b in capital[18]
The Fed's criteria for the Stress Test included measures such as, GDP, unemployment rates, and housing prices. These measures were used to simulate two economic scenarios: one similar to what has been predicted and one that is worse-than-expected. To measure how the bank could withstand such scenarios, the banks were asked to report estimated numbers, such as the amount of write downs and the bank's loan loss provision. Write downs occur when the bank's assets are overvalued compared to market value, so a high write-down number brings uncertainty in the true value of a bank's balance sheets. As "bad loans" were a key driver of the crisis, a bank's loan loss provision (LLP) provides information as to how many "bad loans" the bank has. In short, including write-downs and LLP helps to measure how much public shareholders would receive if the bank were nearing bankruptcy and had to sell most of its portfolio for cash (liquidation).
Acquisitions and Divestitures allow M to remain flexible
A few recent acquisitions and divestitures include:
September 2009: it was announced that the Royal Bank of Canada, Canada's largest bank, will acquire M's investment adviser servicing business. This department of is third-party registered. The transaction is expected to be complete in 2010.[19]
September 2009: M and Cazenove agree to enter into a joint venture for investment banking services in London[19]
June 2009: M completes its acquisition of the hedgefund Highbridge Capital Management.[19]
Bear Stearns Buyout and Washington Mutual
In March of 2008, announced its intention to acquire troubled investment bank Bear Stearns Companies (BSC) for $2.32 per share, significantly less than its closing price of around $30 on the previous trading day. This sent Bear Stearns shareholders into an uproar, which eventually led to raise its offer to about $10 per share, more than four times the original bid. The takeover was approved by shareholders on May 29, 2008. hopes to take advantage of Bear's name and customer relationships to augment its existing investment banking operations. Bear's private equity unit will be spun off, however, as an independent company. will retain a $1 billion stake in Bear Stearns Merchant Banking, which manages about $5 billion.[20]
also acquired Washington Mutual on September 25, 2008 for $1.9B. This pur includes $307B in assets and $188B in deposits [21] will have to work to integrate the two companies together - WaMu is the largest bank, in terms of assets, in history to fail. announced that it plans to lay off 9,500 employees, nearly 1/4th during the transition process. [22] is also at much higher risk because the $307B assets are troubled, and could negatively effect and its balance sheet.
Downturn in US Economic Cycle
US Global gross domestic product fell between .3% - .5% in the Third Quarter 2008 and fell by 6.1% in the Fourth Quarter.[23] The CBO is predicting that there will be a 1.5% decrease in GDP in 2009.[24] As the US economy continues to shrink, M and all other firms will continue to face pressure as investments become less profitable and consumer spending falls.
Interest Rates
In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 2% in July 2008 and 0.5% in July 2009.[25][26] These measures were largely aimed at stimulating economic activity in the face of a potential recession caused by fallout in thesubprime lending industry. will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand. It will also make it a lot easier for M to get credit at low interest rates which will improve its ability to provide loans.
Effects of housing market slowdown
With the slowdown the housing market from 2007 and into 2008 and 2009, 's mortgage lending business is being hit by the slow growth and decreases, in residential real estate prices. The economy as a whole is experiencing the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less, which has negative repercussions for many of M's businesses. The number of total housing starts has fallen by 63% of their peak levels during the end of the housing boom.[27] During the last 3 months of 2008, the nation's banks recorded a total of $26.2B in losses and faced a weighted average of 94% fall in profits.[28] 's Investment Bank and Asset Management segments has specifically taken setbacks due to higher loan loss provisions from mortgages.
Government Regulation
Obama's Bank Plan Restricts Banks' Profit Potential
United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing proprietary trading and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring private equity and hedge funds.[29] The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.[30]
Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as . Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[29]
On August 31, 2010, announced that it will end its proprietary trading business to comply with the Volker Rule. Closing the proprietary trading desk for commodities affects fewer than 20 traders, one in the U.S. and the rest in the U.K. Proprietary traders in fixed-income and equities, who account for 50 to 75 employees, will need to find jobs when those desks are shut down. The closing of the desk not only results in lost jobs, but also lost trading revenue as a result of Obama's Financial regulatory bill.[31]
Credit Card Regulation Costs Hundreds of Millions in Profit
On February 22, 2010, new credit card regulations took effect which banned moves such as changing interest rates on existing balances, and charging over-the-limit fees without customer permission in addition to prohibition on existing balance rate hikes, and the provision that requires all payments be applied to the highest interest rate balances prompted a response. CEO Jamie Dimon announced in his annual letter to shareholders that the new reforms would cut $500 to $750 million from credit card income. In response to these regulations, promptly reduced credit lines and canceled cards customers hadn't used for an extended period.[32]
also sharply cut the number of offers featuring low introductory rates and promotional rate balance transfers. Those offers alone reduced outstanding balances by $20 billion. The bank also announced its plan to no longer offer cards to 15 percent of its current customers.[32]
Barring of Swaps Could Cost Banks $85 Billion in Capital
On April 29th, 2010, debate on financial reform entered into the Senate with the new provision of the Senate Agriculture committee's derivatives bill that would bar swaps dealers from accessing the Federal Reserve's discount lending window or any other government guarantees. Swaps are derivative trades used by banks, financial firms and commercial companies to offset risks or hedge for or against certain outcomes. The biggest U.S. banks such as Stanley, Goldman Sachs Group (GS), and J P (M)are the biggest swaps dealers, controlling 96% of the swaps market.[33]
The new derivatives bill would force banks to spin off their swaps desks and create new entities for swaps dealing activities. The cost of doing is estimated to be about $85 billion in capital. The ultimate purpose of the bill is to separate riskier trading and securities activities of investment banks from federally insured and implicitly guaranteed commercial banks.[33]
Changes in Corporate Tax Law Helps Investment Banking Fees
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.[34]
New Tax Bill Protects Bank's Foreign Profits
President Obama signed a new tax bill in December 2010 that offers a plethora of new tax breaks impacting various companies. There will be exemptions allowing banks, insurance companies and other financial firms to be protected from U.S. taxes for foreign profits until 2011, which will cost the U.S. gov is $9.2 billion. According to Washington Research Group director Anne Mathias, this will benefit multinational banks and financial firms like Citigroup, Bank of America, Goldman Sachs and Stanley and financing operations of other international companies.[35]
Fed Proposes New Legislation to Prevent Money Laundering
The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Several global banks have lately had issues with money laundering probes. Barclays and Wachovia, now part of Wells Fargo (WFC)have agreed to large settlements in 2010. UBS has suffered a substantial $780 million fine due to such issues.[36]
Competitors
Global M&A market share for the first 7 months of 2010[37]
& Co. ranked third among the large US money center banks in terms of assets and second in terms of net revenue for the year 2007.
2009 data Assets ($B)[38]
Revenue ($B)
Bank of America $2,300 $113
J P (M)
$2,000 $101
Citigroup (C)'
$1,800 $106
Wells Fargo (WFC)
$1,200 $51.7
J.P. has the lowest NIM
Card Services, a part of , surpassed Bank of America as the top issuer of Visa and Mastercard in 2006 and has maintained its dominance since then.
Outstanding ($B) Market Share (%)
183.32 19.3
Bank of America
166.32 17.5
Citigroup
106.74 11.2
American Express
88.02 9.3
Capital One
60.08 6.3
[39]
is ranked third in its market share of total deposits in the US behind Bank of America and Wells Fargo. WFC surpassed after it acquired Wachovia (WB) in December of 2008.
Domestic Deposit Market Share (%)
2004 2005 2006 2007 2008[40]
Bank of America (BAC)
10.07 10.36 9.54 10 11.33
Wells Fargo (WFC)
4.90 4.64 5.20 4.2 10.33
J P (M)
4.18 7.07 7.47 7.4 9.85
& Co. (NYSE: M) is one of the largest financial institutions in the United States. Its main services include the provision of credit cards and loans and other financial services to both commercial and individual customers in addition to the underwriting of new debt and equity issuance through itsinvestment banking division. In 2009, 's total net revenue amounted to $108.65 billion, a 49% increase from the previous year. The firm has a significant amount of international exposure, with operations in over 50 countries and clients in every major financial market in the world. [1]
Despite having sold $25B in preferred stock to the US Government through theTroubled Assets Relief Program (TARP) in October 2008, 's performance has been relatively strong thus far.[2] To avoid government interference and increased oversight, it was one of the first financial institutions to repay its TARP funds. It reported record revenues and positive earnings in 2Q2009, despite having incurred more than $25b for repaying its TARP funds, which included more than $800m in dividends for preferred stock. In addition, it reported a Tier 1 Capital Ratio of 9.7%, well above the 4% minimum outlined by the Fed to be considered adequately capitalized.[3]
reported fourth-quarter 2010 net income of $4.8 billion, an increase of 47% compared with $3.3 billion for the fourth quarter of 2009. Earnings per share were $1.12, compared with $0.74 for the fourth quarter of 2009. Full-year 2010 net income was $17.4 billion, an increase of 48% compared with $11.7 billion for the prior year. Earnings per share were $3.96, compared with $2.26 for 2009.[4]
Contents
• 1 Business Overview
o 1.1 Investment Banking (25.9%% of 2009 Net Revenue; 58.8% of 2009 Net Income)[5]
o 1.2 Retail Financial Services (30.1% of 2009 Net Revenue; 0.8% of 2009 Net Income)[5]
o 1.3 Credit Card Services (18.7% of 2009 Net Revenue; -19% of 2009 Net Income)[5]
o 1.4 Asset Management (7.3% of 2009 Net Revenue; 12.2% of 2009 Net Income)[5]
o 1.5 Treasury & Securities Services (6.8% of 2009 Net Revenue; 10.5% of 2009 Net Income)[5]
o 1.6 Commercial Banking (5.3% of 2009 Net Revenue; 10.8% of 2009 Net Income)[5]
o 1.7 Corporate/Private Equity (6% of Net Revenue; 25.8% of Net Income)[5]
• 2 Trends and Forces
o 2.1 Impact of Basel III Rules on Big Banks
o 2.2 Repayment of TARP
2.2.1 $25 Billion Bailout and Repayment
2.2.2 M Passes Stress Test
o 2.3 Acquisitions and Divestitures allow M to remain flexible
2.3.1 Bear Stearns Buyout and Washington Mutual
o 2.4 Downturn in US Economic Cycle
2.4.1 Interest Rates
2.4.2 Effects of housing market slowdown
o 2.5 Government Regulation
2.5.1 Obama's Bank Plan Restricts Banks' Profit Potential
2.5.2 Credit Card Regulation Costs Hundreds of Millions in Profit
2.5.3 Barring of Swaps Could Cost Banks $85 Billion in Capital
2.5.4 Changes in Corporate Tax Law Helps Investment Banking Fees
2.5.5 New Tax Bill Protects Bank's Foreign Profits
2.5.6 Fed Proposes New Legislation to Prevent Money Laundering
• 3 Competitors
• 4 References
Business Overview
Investment Banking (25.9%% of 2009 Net Revenue; 58.8% of 2009 Net Income)[5]
Investment banking is 's chief operation. The investment bank is employed by clients running the gamut from large corporations to governments to financial institutions. offers a wide range of financial services, including risk management, corporate advising, trading and market-making (enabling transactions between buyers and sellers of cash securities andderivatives), capital raising in equity and debt markets, and research. The investment bank is also responsible for investing and trading with the firm's own capital.
Both net revenue and net income increased in this segment in 2009 amounting to a 228% increase in net revenue to $28,109 million and a net income of $6,899 million over a $1,175 loss in the previous year.[5] The segment experienced significant returns over the previous year due to a 38% increase in global investment banking fees amounting to $1.9 billion in 2009, earning the company the #1 ranking for global investment fees and a 9.2% share of the market in 2009.[6] [7]
In the 4th quarter of 2010, net income was $1.5 billion, down 21% compared with the prior year and up 17% compared with the prior quarter. The decrease from the prior year reflected higher noninterest expense, partially offset by higher revenue and a higher benefit from the provision for credit losses; the increase from the prior quarter reflected higher revenue and a higher benefit from the provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $6.2 billion, compared with $4.9 billion in the prior year and $5.4 billion in the prior quarter. Investment banking fees were $1.8 billion, down 3% from the prior year and up 22% from the prior quarter; these consisted of equity underwriting fees of $489 million (down 11% from the prior year and up 47% from the prior quarter), debt underwriting fees of $920 million (up 26% from the prior year and 17% from the prior quarter) and advisory fees of $424 million (down 31% from the prior year and up 10% from the prior quarter). Fixed Income Markets and Equity Markets revenue totaled $4.0 billion, compared with $3.7 billion in the prior year and $4.3 billion in the prior quarter, reflecting solid client revenue. Credit Portfolio revenue was $377 million, primarily reflecting net interest income and fees on retained loans.[4]
Retail Financial Services (30.1% of 2009 Net Revenue; 0.8% of 2009 Net Income)[5]
has the third-largest deposit base in the U.S., and has the largest market share in large cities like Chicago and New York, with the acquisition of Bank of New York's operations. The firm also operates the third-largest ATM network in the United States and the nation's fourth-largest branch network. The segment acquired Washington Mutual for $1.9B from the Federal Deposit Insurance Corporation (FDIC) on Spetember 25, 2008 and completed integration of the firm in 2009. The segment maintained growth with the opening of 6 million new checking accounts in 2009.[6]
The division's net income fell substantially to $97 million in 2009 from $880 in 2008. This decrease was in part due to a net loss in Consumer Lending of $1.4 billion compared with a net loss of $416 million in the previous year. Total revenue in the division in 2009 decreased by 24% to $3.1 billion, reflecting lower MSR risk management results and higher repur reserves, partially offset by wider loan spreads. Credit costs also increased with a $1.5 billion increase in the allowance for loan losses due to a rise in predicted losses in auto, student, and business loans.[6]
In the 4th quarter of 2010, net income was $708 million, compared with a net loss of $399 million in the prior year. Net revenue was $8.5 billion, an increase of $856 million, or 11%, compared with the prior year. Net interest income was $4.8 billion, down by $241 million, or 5%, reflecting the impact of lower loan balances and narrower loan spreads, partially offset by an increase in deposit balances. Noninterest revenue was $3.7 billion, up by $1.1 billion, or 42%, as higher mortgage fees and related income were partially offset by lower deposit-related fees.[4]
Credit Card Services (18.7% of 2009 Net Revenue; -19% of 2009 Net Income)[5]
Card Services, 's credit card services business, is the second-largest domestic issuer of Mastercard (MA) and Visa (V) cards, with a total of 168 million of its cards in circulation. manages more than $190 billion in loans for customers ranging from individual consumers to small businesses. The business has grown naturally and through the acquisition of Washington Mutual's credit card operations. Card Services has recently focused on expanding its network of private-label cards, which are cards issued by a specific retailer and are accepted only by the issuing retailer. 's current partners include BP (BP), Circuit City (CC), and Kohl's (KSS). also issues cards jointly with various organizations, including Walt Disney Company (DIS), AARP, Marriott (MAR), Sony (SNE), and Amazon.com (AMZN). Private-label cards, while they offer better growth opportunities than traditional bank-issued cards, typically experience higher rates of delinquency, which adds additional risk to 's private-label expansion.
Credit Card services accounted for 18.7% of 2009 net revenue. Net income declined by 385% from the previous year due to a high credit costs of $4.2 billion driven by continued high levels of charge-offs and an addition of $400 million to the allowance for loan losses. The worsening economic condition has increased the likelihood of charge-offs and a higher delinquency rate.[6]
In the 4th quarter of 2010, net income was $1.3 billion, compared with a net loss of $306 million in the prior year. The improved results were driven by a lower provision for credit losses, partially offset by lower net revenue. Net revenue was $4.2 billion, a decrease of $902 million, or 18%, from the prior year. Net interest income was $3.4 billion, down by $869 million, or 20%. The decrease in net interest income was driven by lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases were offset partially by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $852 million, a decrease of $33 million, or 4%, due to lower revenue from fee-based products.[4]
Asset Management (7.3% of 2009 Net Revenue; 12.2% of 2009 Net Income)[5]
's asset management division provides retail investors, institutions, and high-net-worth individuals worldwide with investment and wealth management. The division's products and services include management of equities, hedge funds, real estate, fixed income, and private equity investments, as well as trust and estate services for its high-net-worth clients. Asset Management is the leader in asset management with over $1.5 trillion in investment and wealth management. In 2008, the segment's net profit and net revenue both fell. This was caused by lower performance fees from a weaker market overall. As whole, the weakening credit market hurt the segment's performance.[8]
In the 4th quarter of 2010, net income was $507 million, an increase of $83 million, or 20%, from the prior year. These results reflected higher net revenue and a lower provision for credit losses, largely offset by higher noninterest expense. Net revenue was a record $2.6 billion, an increase of $418 million, or 19%, from the prior year. Noninterest revenue was $2.2 billion, up by $409 million, or 22%, due to higher loan originations, net inflows to products with higher margins, the effect of higher market levels and higher performance fees. Net interest income was $381 million, up by $9 million, or 2%, due to higher deposit and loan balances, partially offset by narrower deposit and loan spreads.[4]
Treasury & Securities Services (6.8% of 2009 Net Revenue; 10.5% of 2009 Net Income)[5]
Treasury Services provides cash management, trading, and other services to corporations, financial institutions, and government entities. Securities Services holds, values, and clears securities, cash, and alternative investments for investors and broker-dealers, essentially facilitating transactions on stock markets across the world. In 2008, this division made record profits of $1.8B and a record net revenue of $8.1B on record net revenue of $6.9 billion. Increased usage of its products and services by clients, growth in the volume of electronic transactions, and larger loan balances all contributed to the segment's performance in 2008.[9]
In the 4th quarter of 2010, net income was $257 million, an increase of $20 million, or 8%, from the prior year. These results reflected higher net revenue, primarily offset by higher noninterest expense. Net income increased by $6 million, or 2%, compared with the prior quarter, including an increase in depositary receipts revenue reflecting seasonal activity.
Net revenue was $1.9 billion, an increase of $78 million, or 4%, from the prior year. Worldwide Securities Services net revenue was $960 million, an increase of $43 million, or 5%. The increase was driven by higher net interest income, market levels, and net inflows of assets under custody. Treasury Services net revenue was $953 million, an increase of $35 million, or 4%. The increase was driven by higher trade loan and card product volumes.[4]
Commercial Banking (5.3% of 2009 Net Revenue; 10.8% of 2009 Net Income)[5]
Commercial banking is a small but strong component of 's business, serving over 26,000 clients across the U.S. This division provides a range of banking services to corporations, government agencies, non-profits, and other financial institutions. Comprising only 5.3% of the firm's income, the commercial bank had earned record profits in both 2008 and 2007 with growth maintained in 2009. The segment added $44.5B in loans from the acquisition of Washington Mutual and $2.3B in loans and $1.2B in deposits from the acquisition of The Bank of New York in 2008.[10] Net income amounted to $1,271 million in 2009, a 12% decrease over the previous year due to higher credit costs and increased expenses from higher performance based compensation, and FDIC insurance premiums.[6]
In the 4th quarter of 2010, Net income was $530 million, an increase of $306 million, or 137%, from the prior year. The increase was driven by a reduction in the provision for credit losses and higher net revenue.
Net revenue was a record $1.6 billion, up by $205 million, or 15%, compared with the prior year. Net interest income was $1.0 billion, up by $61 million, or 6%, driven by growth in liability balances and wider loan spreads, partially offset by spread compression on liability products and lower loan balances. Noninterest revenue was $607 million, an increase of $144 million, or 31%, driven by net gains on sales of loans and other real estate owned, increased community development investment-related revenue and higher investment banking fees.[4]
Corporate/Private Equity (6% of Net Revenue; 25.8% of Net Income)[5]
's Corporate/Private Equity division, J.P. Partners, LLC offers fund administration services to private equity funds, institutional limited partners, real estate funds, infrastructure funds, funds of private equity funds, distressed debt and hybrid funds. It currently provides administration services to more than $200 billion in alternative assets. The firm's income from Corporate/Private Equity services amounted to $11,728 million in 2009, constituting 25.8% of total net income and an increase of 209% from $5,605 million in 2008.[5] In 2009, was ranked as top provider of private equity fund administration, according to a key industry survey by Global Custodian magazine. It received best-in-class recognition across 54 service categories, securing more top ratings than any other administrator.[11]
In the 4th quarter of 2010, Net income was $29 million, compared with net income of $1.2 billion in the prior year. Private Equity net income was $178 million, compared with $141 million in the prior year. Net revenue was $355 million, an increase of $59 million, driven by higher private equity gains. Noninterest expense was $77 million, an increase of $1 million from the prior year.
Corporate reported a net loss of $149 million, compared with net income of $1.1 billion in the prior year. Net revenue was $1.3 billion, including $1.2 billion of securities gains. Noninterest expense reflected an increase of $1.5 billion for litigation reserves, predominantly for mortgage-related matters.[4]
Income Statement $M [12]
2005 2006 2007 2008[13]
2009[5]
Non-interest Revenue ($M) 34,693 40,757 44,966 28,473 49,282
Net Interest Income ($M) 19,555 21,242 26,406 38,779 51,152
Total Net Revenue ($M) 54,248 61,999 71,371 67,252 100,434
Total Net Income ($M) 8,483 14,444 15,365 5,605 11,728
Trends and Forces
Impact of Basel III Rules on Big Banks
The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults.
Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets.
The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as Stanley, Goldman Sachs Group (GS), J P (M), and Citigroup (C) will not see their businesses change with the passing of these rules.
Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.
The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.[14]
Repayment of TARP
$25 Billion Bailout and Repayment
In June 2009, announced that it had received permission to repay the $25b in TARP funds it had received from the government. It was one of the first financial institutions allowed to repay TARP funds because of its strong financial position, as well as its fulfillment of the conditions outlined by the Fed. This includes the passing grade that M got on the Stress Test in May.
The repayment of the TARP funds has cost M more than the $25b loan. It incurred a near $800m payment to the U.S. Treasury in dividends on the preferred stock it purd, a non-cash $1.1b charge against its second quarter results, and a future payment to repur a 10 year warrant.[15][16] Although M incurred a $1.1b charge in 2Q 2009, it still reported positive earnings of $2.7b and record revenues of $27.7b.[3] In addition, it reported a Tier 1 Capital Ratio of 9.7%, which is well above the 4% minimum to be "adequately capitalized."[3] The Fed used the Tier 1 Capital Ratio as a measure for the Stress Test it conducted in February 2009.
M Passes Stress Test
In February, Secretary of Treasury Timothy Geithner announced that banks with more than $100 billion in assets will be required to participate in a "stress test" -- a series of financial assessments to determine the health of the bank and if the bank needs additional capital.[17] passed the Stress Test and was not required to raise additional capital. However, ten of its competitors had to raise approximately $175b in capital[18]
The Fed's criteria for the Stress Test included measures such as, GDP, unemployment rates, and housing prices. These measures were used to simulate two economic scenarios: one similar to what has been predicted and one that is worse-than-expected. To measure how the bank could withstand such scenarios, the banks were asked to report estimated numbers, such as the amount of write downs and the bank's loan loss provision. Write downs occur when the bank's assets are overvalued compared to market value, so a high write-down number brings uncertainty in the true value of a bank's balance sheets. As "bad loans" were a key driver of the crisis, a bank's loan loss provision (LLP) provides information as to how many "bad loans" the bank has. In short, including write-downs and LLP helps to measure how much public shareholders would receive if the bank were nearing bankruptcy and had to sell most of its portfolio for cash (liquidation).
Acquisitions and Divestitures allow M to remain flexible
A few recent acquisitions and divestitures include:
September 2009: it was announced that the Royal Bank of Canada, Canada's largest bank, will acquire M's investment adviser servicing business. This department of is third-party registered. The transaction is expected to be complete in 2010.[19]
September 2009: M and Cazenove agree to enter into a joint venture for investment banking services in London[19]
June 2009: M completes its acquisition of the hedgefund Highbridge Capital Management.[19]
Bear Stearns Buyout and Washington Mutual
In March of 2008, announced its intention to acquire troubled investment bank Bear Stearns Companies (BSC) for $2.32 per share, significantly less than its closing price of around $30 on the previous trading day. This sent Bear Stearns shareholders into an uproar, which eventually led to raise its offer to about $10 per share, more than four times the original bid. The takeover was approved by shareholders on May 29, 2008. hopes to take advantage of Bear's name and customer relationships to augment its existing investment banking operations. Bear's private equity unit will be spun off, however, as an independent company. will retain a $1 billion stake in Bear Stearns Merchant Banking, which manages about $5 billion.[20]
also acquired Washington Mutual on September 25, 2008 for $1.9B. This pur includes $307B in assets and $188B in deposits [21] will have to work to integrate the two companies together - WaMu is the largest bank, in terms of assets, in history to fail. announced that it plans to lay off 9,500 employees, nearly 1/4th during the transition process. [22] is also at much higher risk because the $307B assets are troubled, and could negatively effect and its balance sheet.
Downturn in US Economic Cycle
US Global gross domestic product fell between .3% - .5% in the Third Quarter 2008 and fell by 6.1% in the Fourth Quarter.[23] The CBO is predicting that there will be a 1.5% decrease in GDP in 2009.[24] As the US economy continues to shrink, M and all other firms will continue to face pressure as investments become less profitable and consumer spending falls.
Interest Rates
In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 2% in July 2008 and 0.5% in July 2009.[25][26] These measures were largely aimed at stimulating economic activity in the face of a potential recession caused by fallout in thesubprime lending industry. will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand. It will also make it a lot easier for M to get credit at low interest rates which will improve its ability to provide loans.
Effects of housing market slowdown
With the slowdown the housing market from 2007 and into 2008 and 2009, 's mortgage lending business is being hit by the slow growth and decreases, in residential real estate prices. The economy as a whole is experiencing the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less, which has negative repercussions for many of M's businesses. The number of total housing starts has fallen by 63% of their peak levels during the end of the housing boom.[27] During the last 3 months of 2008, the nation's banks recorded a total of $26.2B in losses and faced a weighted average of 94% fall in profits.[28] 's Investment Bank and Asset Management segments has specifically taken setbacks due to higher loan loss provisions from mortgages.
Government Regulation
Obama's Bank Plan Restricts Banks' Profit Potential
United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing proprietary trading and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring private equity and hedge funds.[29] The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.[30]
Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as . Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[29]
On August 31, 2010, announced that it will end its proprietary trading business to comply with the Volker Rule. Closing the proprietary trading desk for commodities affects fewer than 20 traders, one in the U.S. and the rest in the U.K. Proprietary traders in fixed-income and equities, who account for 50 to 75 employees, will need to find jobs when those desks are shut down. The closing of the desk not only results in lost jobs, but also lost trading revenue as a result of Obama's Financial regulatory bill.[31]
Credit Card Regulation Costs Hundreds of Millions in Profit
On February 22, 2010, new credit card regulations took effect which banned moves such as changing interest rates on existing balances, and charging over-the-limit fees without customer permission in addition to prohibition on existing balance rate hikes, and the provision that requires all payments be applied to the highest interest rate balances prompted a response. CEO Jamie Dimon announced in his annual letter to shareholders that the new reforms would cut $500 to $750 million from credit card income. In response to these regulations, promptly reduced credit lines and canceled cards customers hadn't used for an extended period.[32]
also sharply cut the number of offers featuring low introductory rates and promotional rate balance transfers. Those offers alone reduced outstanding balances by $20 billion. The bank also announced its plan to no longer offer cards to 15 percent of its current customers.[32]
Barring of Swaps Could Cost Banks $85 Billion in Capital
On April 29th, 2010, debate on financial reform entered into the Senate with the new provision of the Senate Agriculture committee's derivatives bill that would bar swaps dealers from accessing the Federal Reserve's discount lending window or any other government guarantees. Swaps are derivative trades used by banks, financial firms and commercial companies to offset risks or hedge for or against certain outcomes. The biggest U.S. banks such as Stanley, Goldman Sachs Group (GS), and J P (M)are the biggest swaps dealers, controlling 96% of the swaps market.[33]
The new derivatives bill would force banks to spin off their swaps desks and create new entities for swaps dealing activities. The cost of doing is estimated to be about $85 billion in capital. The ultimate purpose of the bill is to separate riskier trading and securities activities of investment banks from federally insured and implicitly guaranteed commercial banks.[33]
Changes in Corporate Tax Law Helps Investment Banking Fees
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.[34]
New Tax Bill Protects Bank's Foreign Profits
President Obama signed a new tax bill in December 2010 that offers a plethora of new tax breaks impacting various companies. There will be exemptions allowing banks, insurance companies and other financial firms to be protected from U.S. taxes for foreign profits until 2011, which will cost the U.S. gov is $9.2 billion. According to Washington Research Group director Anne Mathias, this will benefit multinational banks and financial firms like Citigroup, Bank of America, Goldman Sachs and Stanley and financing operations of other international companies.[35]
Fed Proposes New Legislation to Prevent Money Laundering
The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Several global banks have lately had issues with money laundering probes. Barclays and Wachovia, now part of Wells Fargo (WFC)have agreed to large settlements in 2010. UBS has suffered a substantial $780 million fine due to such issues.[36]
Competitors
Global M&A market share for the first 7 months of 2010[37]
& Co. ranked third among the large US money center banks in terms of assets and second in terms of net revenue for the year 2007.
2009 data Assets ($B)[38]
Revenue ($B)
Bank of America $2,300 $113
J P (M)
$2,000 $101
Citigroup (C)'
$1,800 $106
Wells Fargo (WFC)
$1,200 $51.7
J.P. has the lowest NIM
Card Services, a part of , surpassed Bank of America as the top issuer of Visa and Mastercard in 2006 and has maintained its dominance since then.
Outstanding ($B) Market Share (%)
183.32 19.3
Bank of America
166.32 17.5
Citigroup
106.74 11.2
American Express
88.02 9.3
Capital One
60.08 6.3
[39]
is ranked third in its market share of total deposits in the US behind Bank of America and Wells Fargo. WFC surpassed after it acquired Wachovia (WB) in December of 2008.
Domestic Deposit Market Share (%)
2004 2005 2006 2007 2008[40]
Bank of America (BAC)
10.07 10.36 9.54 10 11.33
Wells Fargo (WFC)
4.90 4.64 5.20 4.2 10.33
J P (M)
4.18 7.07 7.47 7.4 9.85
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