Profit Outlook Darkens for Big Banks

--bank business model: Make loans that are then sold off to investors while arranging corporate financing through off-balance-sheet vehicles that keep banks' capital costs down. --Now, banks are holding on to more of the loans they make, as they did years ago. And the off-balance-sheet lending business is crippled. --Less securitization means lower fee income; more loans on the balance sheets mean higher capital charges; bigger balance sheets mean less capacity to make new loans. --Through 2006, the three big banks' (Citi, BAC, JPM) average annual profits had grown at a roughly 20% clip during the past three years, according to data provider Capital IQ. That is likely to slow significantly, analysts say. Through 2009, the three banks' combined earnings are expected to be just 5.5% higher than they were at the end of 2006, according to some analyst forecasts. --Investors also will have to contend with another unsettling phenomenon -- bank profits that may swing wildly from quarter to quarter. That is because banks are using market values for more of the assets they hold on their books, meaning their prices fluctuate like those of stocks. --There also may be a silver lining: Banks may end up in better shape if weaned from an over-reliance on securitization, said Gerard Cassidy, an RBC Capital Markets analyst. --Meantime, changes being wrought to the banking business model are quickly becoming apparent. Citigroup has seen the amount of loans and leases it holds in inventory -- and doesn't plan to sell to investors -- increase to about $697 billion at the end of September, up about 9% over six months, according to data from IRA. --Banks are likely to make up for those lost fees by increasing the interest rates they charge on loans, Mr. Poulos added. But that will diminish companies' ability to take on debt, which could hurt the wider economy.