Date: January 19, 2000
Question: "Bank Earnings: The Good, The Bad, and the Ugly?"
Answer: When it comes to earnings for banks, all three descriptives apply.
During the past decade, the movement from fluctuating net interest income and margins fostered an emphasis on seemingly more stable fees. These fees ranged from originating and servicing mortgages to charging for checking accounts and trust management. That's the good.
The bad is the masked credit quality deterioration coupled with a heavy reliance on late fees, little or no grace periods, and IRA and Credit Card annual servicing charges. That's the bad.
The ugly will surface when questionable Asset Backed Securities (ABS) paper suffers greater than expected default rates. One trigger for this event is poor credit card portfolio holdings and a reliance on late fees and escalated interest rates relative to ordinary income and interest streams.
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