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DealBook: Big Banks, Flooded in Profits, Fear Flurry of New Safeguards

Brendan Smialowski/Agence France-Presse — Getty ImagesTreasury Secretary Jacob J. Lew

The nation’s six largest banks reported $23 billion in profits in the second quarter, but they could end up victims of their own success.

In recent weeks, the Treasury Department, senior regulators and members of Congress have stepped up efforts intended to make the largest banks safer. The banks have warned that more regulation could undermine their ability to compete and curtail the amount of money they have to lend, but the strong earnings that came out over the last week could undercut their argument.

The most pressing concern for banks is a relatively tough new rule that regulators proposed last week that could force banks to build up more capital, the financial buffer they maintain to absorb losses. But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis.

This was highlighted on Wednesday when the Treasury secretary, Jacob J. Lew, effectively issued an ultimatum to Wall Street, calling for the swift adoption of rules introduced through the Dodd-Frank financial overhaul law, which Congress passed in 2010. Mr. Lew also said that he might be open to stricter measures if enough had not been done to remove the threat that big banks can pose to the wider economy.

“If we get to the end of this year, and cannot, with an honest, straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options because the policy of Dodd-Frank and the policy of the administration is to end ‘too big to fail,’ ” Mr. Lew said.

“This is maybe the strongest admission I’ve heard from the administration that we must act further to end ‘too big to fail,’ ” Senator David Vitter, Republican of Louisiana, said in a statement. Along with Senator Sherrod Brown, Democrat of Ohio, Senator Vitter introduced a bill earlier this year that would sharply increase capital levels at the biggest banks. In Congress on Thursday, Ben S. Bernanke, the Federal Reserve chairman, echoed Mr. Lew’s remarks. He said that if the measures already planned did not remove the risks posed by large banks, “additional steps would be appropriate.”

Still, some analysts remain skeptical that the Fed and the Treasury would really lend their weight to the sort of aggressive measures some lawmakers are contemplating. The recent comments may be an attempt to gain some political benefit from looking tough on the banks. And the remarks may be aimed at reducing any momentum that the more draconian pieces of bank legislation are gaining in the Senate.

“I wonder how much of this is a serious policy change and how much is positioning by the administration to take on a more populist mode going into 2014,” Nolan McCarty, a professor of politics and public affairs at Princeton University, said. “It’s a little bit surprising that, three years after Dodd-Frank and five years after the financial crisis, people are concerned not enough has been done.”

Still, the stronger words from government officials could shift the balance of power away from the banking industry.

“I sense a sea change in this,” Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, said. “It’s not moving with the banks, it’s moving against them.”

The resurgence in bank profits appears to have been an important factor in persuading regulators to do more. The earnings revival did not take place just at the banks that emerged from the crisis in a position of relative strength, like JPMorgan Chase and Wells Fargo. This week, both Bank of America and Citigroup, which faltered badly after the financial crisis, reported healthy profits. The stocks of both banks have nearly doubled over the last 12 months, highlighting that investors’ faith in the behemoths is also returning.

“The regulators are doing this because they can,” Michael Mayo, a banking analyst at CLSA, said. “And they can at this time of relative stability.”

The six largest banks now dominate the industry, accounting for more than half the sector’s assets. Since the crisis, this has helped them make profit from mortgages and credit card loans, as well as Wall Street activities, like trading securities and underwriting deals. Their second-quarter profits were up 40 percent compared with those in the period a year earlier. Over the last 12 months, their combined profits were more than $70 billion. Over that period, Morgan Stanley, Goldman Sachs and JPMorgan’s investment bank, all big presences on Wall Street, paid compensation of $41 billion.

Regulations planned or put in place in the crisis may also have helped banks by making them more resilient to shocks. The banks have assets on their balance sheets that helped them through the recent rout in the bond market without big losses.

“You had major dislocations in currencies, commodities and interest rates and so far the industry has passed with flying colors,” Mr. Mayo said.

Still, Mr. Mayo and others question how healthy the banks are. While profits are up, and trading profits are buoyant, the pace of lending is not picking up. “Loans are down year to date. That’s the issue at the moment,” he said. “This is not the stuff robust recoveries are made of.”

Yuri Gripas/ReutersThomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, at a House panel in June.

The industry contends that, with economic growth still relatively weak, more regulation of banks would be wrong.

“You have to be cautious about what layering on additional things can do to our prospects for economic growth, job creation and credit availability, in light of this economic fragility,” said Robert S. Nichols, president of the Financial Services Forum, an industry group that represents large banks. “We have to have more robust growth to get Americans back to work.”

While banks have made big profits under stiffer rules since the crisis, some analysts warn that adding more to the overhaul could really start to hurt.

“We’ve reached a point now where we have a balance,” John R. Dearie, who oversees policy at the Financial Services Forum, said. “We have a fortress balance sheet banking system. Our concern is that we don’t overdo it.”

Still, some banking experts think the banks are bluffing when they say more regulation could hamper lending. “They can’t see that it is in their long-term interests to have a credible regulatory process,” Ms. Bair said.

Free-Messaging Apps Siphon Profits from Cellular Providers

Relief is on the way. Cellphone users are sending more text messages than ever, but increasingly they are free — thanks to the Internet. While that is good news for consumers, it could cost the world’s wireless companies tens of billions of dollars in lost revenue.

Standard texting, the kind where you send abbreviation-filled messages over a cellphone network, has been in decline in many parts of the world, and now appears to be shrinking in the United States. That is because smartphones can use free Internet-powered services that send messages over data networks instead, and those services are attracting millions of users.

The shift is opening an opportunity for big companies like Facebook and Apple and smaller start-ups like WhatsApp and Kik, which are making aggressive grabs at this market, aiming to put themselves at the center of how people communicate in the smartphone era.

Peter Deng, a product director at Facebook who oversees its Messenger software, said that text messaging was “ripe for innovation” because it had been held back by outdated technology.

“It’s limited to 160 characters,” Mr. Deng said, “and it’s not at all rich in its expression. People want to connect deeply with each other, and they don’t want to be constrained by various technical boundaries and decisions made 20 years ago.”

Unlike ordinary text messages, Facebook’s messaging service allows people to see when their friends are typing a reply and when messages are received, among other features, he said.

Standard texting is still popular. CTIA, the wireless industry trade group, said that in the first half of this year, Americans sent 1.107 trillion text messages. But that was down 2.6 percent from the 1.137 trillion messages sent in the first half of last year. Ovum, a mobile communications research firm, estimates that by 2016, Internet-based message services will have eaten up $54 billion in revenue that carriers could have made from text messaging.

For years, text messages have been a source of pure profit for carriers because it costs nearly nothing to deliver them. In response to the rise of Internet services, they have been overhauling their pricing plans to stay profitable.

Verizon Wireless and AT&T, for example, offer new plans that include unlimited texting and phone calls, while charging bigger fees for using Internet data, which is likely to be their main source of growth. (Internet messaging over a carrier’s data network does use up some of a customer’s monthly data allotment, but it is a tiny amount relative to, say, watching a video.)

John Walls, vice president for public affairs at CTIA, said carriers were always expanding their services by offering things like all-you-can-eat texting plans and the ability to donate to charity via text. He noted that 72,000 text messages were being sent every second of every day.

“I hardly think the end is in sight for texts,” Mr. Walls said.

For Internet companies, messaging will never be a cash cow. But they have other reasons to get excited about this market.

Facebook benefits if more people use its messaging service, because those people are likely to spend more time on its Web site and mobile apps, seeing more ads. On Tuesday the company said it would allow Android users in some countries to sign up for its messaging service with just a phone number, no Facebook account required, partly because this might eventually persuade non-Facebook users to cave in and sign up for an account. That feature will come to the United States at some point, Facebook said.

Apple’s free texting service, iMessage, comes installed on iPhones, iPads and iPod Touch devices, where it automatically routes messages over the Internet if they are being sent to another Apple device. The service also works with the Messages app on Apple’s computers. That could encourage people to continue buying Apple products to keep in touch with family and friends cheaply and easily. Even the design of iMessage makes people feel like they’re in a special clique: an iMessage shows up on an Apple device as a blue bubble, while a normal text message from a non-Apple phone is green.

Perhaps the most talked-about player in texting right now is the small start-up WhatsApp, based in Mountain View, Calif. The 30-person company, founded by Jan Koum and Brian Acton, two former Yahoo executives, says its service is used in more than 100 countries. Its app is one of the most popular in the world on iPhones and Android devices, and on the BlackBerry it is even bigger than Research in Motion’s own messaging service.

Media Decoder Blog: Olympics and Asset Sales Help Lift Comcast Profits

Aided by the sale of assets and a lift from the Summer Olympics, Comcast reported strong third-quarter growth on Friday, surpassing expectations on several crucial measures.

The nation’s largest cable company said its net income rose to $2.11 billion, or 78 cents a share, compared with $908 million, or 33 cents a share, in the same quarter last year. Most of the increase was attributed to the sale of spectrum to Verizon Wireless and the sale of its 15.8 percent stake in A&E Television Networks. Excluding the sales, net income was $1.25 billion, or 46 cents a share, in line with analysts’ estimates.

The company’s overall revenues rose to $16.5 billion, beating estimates. Its core cable business lost 117,000 of 22 million video subscribers, not quite as many as analysts had forecast — and more importantly, 29 percent less than were lost during the same quarter last year. Meanwhile, its broadband business gained 287,000 subscribers, topping 19 million for the first time, a bit more than forecast.

Most importantly for Comcast, its average video subscriber paid more than ever for its services, topping $150 a month for the first time — more than offsetting the slight decline in total subscribers. Total revenues for video, broadband, business services and the rest of the Cable Communications business totaled at $9.97 billion, up from $9.33 billion in the same quarter last year.

Comcast’s other business, NBCUniversal, which it took over last year, also posted gains in the third quarter, thanks in part to the broadcast of the Summer Olympics in July and August. So much for a projected $200 million loss on the Olylmpics; in the third quarter the company reported $120 million in profits from the Games, due in part to higher-than-expected television ratings. Over all, when other revenues and expenses are added up, NBC will break even on its investment, Comcast’s chief financial officer, Michael Angelakis, said Friday.

The Olympics lifted NBCUniversal’s broadcast television segment to a $88 million profit of the quarter; without the Games, broadcast would have reported a $32 million loss, somewhat worse than the $7 million loss in the same quarter last year. Comcast’s earnings release cited two reasons for that: “higher programming costs” because NBC started some of its fall shows earlier than usual, and expenses tied to news coverage of the presidential election.

Brian Roberts, Comcast’s chief executive, told investors on a conference call Friday morning that NBC was “off to a very strong start in this prime time season.” The network has been winning in the advertiser-friendly demographic of adults 18 to 49 for seven weeks.

“It’s certainly early, but I believe and hope we are seeing the beginning of a turnaround at NBC,” Mr. Roberts added.

Including $1.2 billion in Olympics revenue, NBCUniversal as a whole posted $6.8 billion in revenue, up from $5.2 billion in the same quarter last year. The cable networks segment, an umbrella for channels like Bravo and E!, showed no advertising revenue growth in the quarter, but showed slight growth overall thanks to higher per-channel subscriber fees. The film segment showed a 24 percent revenue gain, to $1.4 billion, thanks to successful theatrical releases like “Ted” and “The Bourne Legacy.”