Banks have taken a lot of criticism and they deserve it.  As you know, banks make their money from interest rate spreads and charging fees on accounts.  Below we analyze these key business factors to determine the attractiveness of the banking sector.

Taxpayers bailed out the top money center banks with $145 billion in TARP Funds and allowed banks to recover.  See market cap impact below.

The fed continues to keep rates at abnormally low levels which helps banks borrow huge amounts of capital and lock in spreads.

Bank Response to Rescue

As all of this has taken place, the top money center banks proceeded to increase service fees and dilute shareholders.  Banks will generate close to $40 billion from service fees on their customer accounts this year and the trend is up and to the right.

For example, Bank of America generated over $10 billion in service fees during the last year.  This represents a significant part of BofA’s revenues at high margins.  As you can see below, Bank of America has steadily increased their service charges over the last couple of years.  You get the full details here.

BofA is planning to continue increasing fees and annual credit card fees are next.

“According to BofA spokesperson Betty Reiss, the annual fees would range from $29 to $99,  “We’re testing this to see what the feedback is.  Fees are being added based on “risk and profitability”.

All of the major banks generate a large percentage of their revenue from service fees and they do this at huge margins so a fair amount of the bottom line is driven by service fees.

What are the fees for?

WellsFargo details their diversified fee strategy below.

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The chart below is telling.  The big banks raised overdraft fees from $23.70 in 2002 to $33.43 in 2008.  The 41% increase in bank fees over 6 years has increased the banks bottom line and come from the weakest consumers for the most part.

Below are the top major money center banks by market capitalization.  JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).

Customer Experience

You are most likely a customer and have experienced the fees on cash withdrawals, bank account maintenance fees, credit cards and mortgages.  You may not enjoy being a customer but you have to admit that the business model is scaleable.

Business Metrics

The fed continues to hold rates low which enables banks to make solid interest rate spreads, banks continue to raise fees and capital ratios have improved (see below).

Tier 1 Capital Ratios

Improved Cash Positions

Real Estate Market

The big challenge in moving into the banks is anticipating the real estate market recovery.  If the real estate market doesn’t get worse or even improves a little the banks will be in much better shape.  The correction eliminated a lot of bubble wealth and appears to be stabilizing.

Real Estate Prices

Conclusion

We would cautiously get exposure in the banking sector.  The major money center banks have already paid back their TARP funds and diluted prior shareholders.  It is hard to see how the major banks will loose over the long-term given the accommodative fed policy, ease of generating and increasing fees, plus all of the safety nets in place thanks to their customers/taxpayers.

You can analyze all of the banks here.