Charting Banking VI: industry profits
by PlanMaestro
In trying to understand the state of the sector, the sharp recovery of the financial industry profits has been the most surprising event. Here is graph from a Moody’s recent presentation based on national accounts data:
The main reason for this recovery despite the heavy losses of several banks between 2007 and 2009 was the big bailout that we discussed in the first installment of the series. This low interest rate environment combined with less competition has been a boom for the survivors. And even those on the edge are recapitalizing and may have a second chance.
The big implication is that since the USA still has an economy heavily dependent on the financial industry, as can be seen from this chart from a recent column by Paul Krugman , its ability to profit its way to health is good news.
Variant Perceptions 
[…] hope to have already addressed the first question by showing how the industry profits have rebounded and how the supposedly next shoe to drop have been grossly exaggerated in its impact while the real […]
Is there any way to figure out:
1. What is the percentage of the profits coming from interest mismatch? Right now short term interest is nearly 0%, but long term rate is still ok, so this part of profit is illusory.
2. What is the percentage of profits from trading? I know GS and other banks made a huge profit in trading because of the bull market last year.
1. Some banks report their sensibility to interest rate hikes, but not all of them. It is difficult to quantify because some loans are also short term. My thesis is that we are for low interest rates for several years a la Japan. Besides when you are buying below book…
2. For most of these small banks, propietary trading is not relevant. I usually go to the operating cash flow statement to check any particular one offs.
For point two, isn’t the first chart you are showing including trading profits from major banks?
Yes, includes all profits