NEW YORK — Wall Street's five biggest banks reported the worst start to a year since 2008. They're still asking investors to be patient.
JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since the $135 billion they reported four years ago. The banks blamed the decline on low interest rates and a drop in trading and dealmaking driven by concerns about European government finances and slowing growth in the United States and China.
Most of the banks have failed since 2009 to earn a return that exceeds their cost of capital, said Roy Smith, a finance professor at New York University's Stern School of Business and a former Goldman Sachs partner. The impact of new capital requirements and legislation such as the 2010 Dodd-Frank Act is having a more profound effect on profitability than managements seem willing to acknowledge, he said.
"I've been wondering how long this has to go on before people started to take it seriously," Smith said in a telephone interview. "This is a long time for this to continue, and it's just getting worse."
While Goldman Sachs said it will seek $500 million in expense cuts focused on personnel costs this year after reporting an 11 percent drop in second-quarter profit, the New York-based firm, like its competitors, has resisted calls for more radical changes to its business model.
The day after the bank reported its lowest first-half revenue in seven years, chief executive officer Lloyd Blankfein explained the dilemma he faces as he asks shareholders to wait for the rebound he's expecting.
While Bank of America's second-quarter profit of $2.46 billion showed an improvement over a record $8.83 billion loss in the same period last year, shareholders were spooked by a jump in mortgage-bond repurchase demands that cast doubt on whether the bank's recovery will last. The lender, the second-biggest in the U.S. by assets, plans to trim $3 billion in annual expenses from investment banking, trading and wealth-management units.
"We continue to have work to do, as you can see in the numbers," Brian Moynihan, 52, CEO of the Charlotte, N.C., bank, said of his company's earnings on conference call Wednesday with analysts and investors. "But we've put ourselves in a position to be successful."
Morgan Stanley, which reported a 50 percent drop in second-quarter profit that missed analysts' estimates, said it will eliminate 700 more jobs by the end of 2012, bringing the total for the year to 4,000.
In their 2009 book This Time is Different: Eight Centuries of Financial Folly, economists Carmen Reinhart and Kenneth Rogoff showed that financial crises cause deep economic slumps in developed and emerging-market economies. So it's not a surprise that would affect banks' profits.
"The U.S. continues to follow the slow and halting recovery that is characteristic of the aftermath of deep financial crises, and recent weakness in bank profit statements in part reflects this reality," said Rogoff, a professor at Harvard University.