What will offset tepid loan demand? How to cover higher regulatory costs? Some of the nation's top banking chiefs said Tuesday that they are starting to find the answers to these nagging questions.
A common reply: Sell existing customers more products while investing in businesses that don't depend on lending, like investment advising and corporate cash management.
Bankers also said they are getting a firmer grasp of how much money they can expect to lose complying with the Dodd-Frank act and new restrictions on overdraft fees. The changes may not be as costly as initially expected, and will likely be offset through new fees and products.
"We're going to earn it all back — whatever it is," Jamie Dimon, chairman and chief executive of JPMorgan Chase & Co., said during the keynote address at the Barclays Capital 2010 Financial Services Conference.
He and the heads of Bank of America Corp., Fifth Third Bancorp. and PNC Financial Services Group Inc. said that their institutions are large and diversified enough to be able to offset the toll that reform expenses and tepid lending could take on profits for years.
BB&T Corp.'s initial regulatory cost estimates won't come in "anywhere near" its initial estimate of more than $210 million in 2010 and 2011 as it adjusts product fees to "eradicate" expense increases, said Kelly King, the Winston-Salem, N.C., company's CEO.
Most bankers said it was too early to determine the full impact of the Basel Committee on Banking Supervision's proposal to force banks to hold 7% common equity by 2019. Most executives said there were still questions about how U.S. regulators would interpret that rule. But they offered mild support for it while noting that their institutions have enough capital to comply should that change go into effect.
"We would not expect them to present any difficulty for Fifth Third if they end up being approved and adopted," said Kevin T. Kabat, the Cincinnati lender's president and CEO.
Dimon said he expects banks to offer fewer free products and services while shrinking their client pools by about 5%.
Changes to the derivatives market alone could cost JPMorgan Chase more than $1 billion of revenue. But Dimon said the New York company has the cash and scale to handle reform costs, describing them as "manageable."
The reason for that is the strength of the six separate companies that operate under the JPMorgan Chase brand. Dimon opened his speech raving about each one of them. He described the investment bank's top rankings around the globe, the retail banks' "beautiful branches" and the "great margins" of the asset management arm.
A presentation slide detailed how the company would be able to deliver healthy profits and returns even if the unemployment rate peaked at 12% in two years.
"This shows you the earnings power of the company … and it's huge," Dimon said.
Dimon was the marquee speaker of the two-day conference, which Barclays Capital described as one of its best-attended ever. The strong showing illustrated just how nervous investors and analysts are about the shaky standing of U.S. banks. Though losses on business and home loans are starting to fall, they're still very high by historical standards. Also, banks are finding it all but impossible to make money doing what they do best: collecting deposits and lending them out.
Revenue growth is a major concern with margins and income squeezed by the slow economy and regulatory reform.
Brian Moynihan, president and CEO of Bank of America, said the Charlotte company would offset reform costs through branch closures and layoffs. It is relying less on bank tellers, where transactions fell 5% in the past year. Automated transactions were up 5%. Bank of America also plans to raise deposit account minimums and monthly fees.
Like other big lenders, Bank of America is looking to address the growth problem by maximizing the number of products and services sold to each customer. A main focus: getting wealthy customers and wealth management clients to move more of their investments and deposits from competitors.
PNC's chief, James Rohr, said the Pittsburgh company is counting on cross-selling to drive profits, too. The ability to do it well could determine which banks survive and which ones don't, he said.
Interest rates are high, he said. Loan demand is down. So trying to lend is unwise, he said, because it would mean loosening standards and lowering prices.
"We can't change interest rates. We can't force loan demand unless you're going to do something stupid," Rohr said.
He said the industry is moving away from its reliance on deposit-related income to fee-based income involving products and services that "really matter" to customers. For its part, PNC generates fee income from its corporate services arm, asset management division and residential mortgage unit, among other business lines.
"We're OK with that. We don't like it — but we have a model that" will succeed "in that environment," Rohr said. "Many, many banks have millions of customers. Their only fee income is overdraft protection."