For several quarters banking companies have been able to sustain profits with the help of consumer businesses that continue to chug along despite signs of a weakening economy; therefore many observers look to the consumer sector to continue to insulate banks from the malaise.

Comparing Citigroup Inc. to J.P. Morgan Chase & Co. illustrates the point. Both have suffered from a downturn in investment banking, and both are also taking a harsher line on expenses, cutting perks and slashing staff in hard-hit areas like brokerage and investment banking.

But Citigroup’s consumer businesses have made all the difference on the bottom line, letting the company show earnings growth despite all the market-related troubles and present to Wall Street an impression that its performance, quarter-to-quarter, is relatively smooth.

At J.P. Morgan Chase, the product of the merger of Chase Manhattan and J.P. Morgan, the story has been strikingly different, at least when viewed through the prism of Chase’s predecessor business, which had a proportionately higher exposure to retail.

But with unemployment, bankruptcy filings, and general feelings of gloom on the rise, can consumers continue to carry the torch? Or is Citi’s (and other retail-intensive companies’) relative advantage already disappearing?

Richard Strauss, an analyst at Goldman Sachs, takes the view that the downturn’s effects will eventually catch up to every participant in financial services. “How bearish you are [on the group] depends on your view of how severe things will actually get,” he said.

The Labor Department said Friday that unemployment rose 0.4% in August, to a four-year high of 4.9%, up from the 4.5% rate that had prevailed since April, and up a full point from last year’s historic low of 3.9%. Bankruptcy filings, which surged this year in advance of legal changes designed to make it harder for consumers to duck debt obligations, have failed to slow and are up more than 20% since this time last year.

Adding to the gloom, early predictions of a market rebound in the second half of the year have failed to be realized. The Dow Jones industrial average is again below 10,000, and the S&P 500 hovers around its low for the year after bouncing back early in the summer and sparking hopes of a second-half rebound.

“There is perhaps a belated recognition that, while things aren’t catastrophic, there are real problems that aren’t going to disappear quickly,” said Sean Ryan, an analyst at Fulcrum Global Partners in New York whose warnings about a worsening consumer picture have contradicted the more widely held optimistic view.

“It’ll take some time to work them out,” Mr. Ryan continued, “I don’t think the world’s going to end, but in the first half of the year everyone was talking about the recovery, and now we’re about halfway through the second half of the year, and it just hasn’t happened.”

In fairness, though, things still look pretty good compared to a decade ago, when a recession and collapsing real estate values put many banks in serious trouble. Better risk management, improved lending standards, and the secondary loan market have helped most banks escape the worst problems of the corporate lending sector this time around. Even the companies that have been caught holding big chunks of problem loans — Wachovia Corp., Bank One Corp., and Bank of America Corp., for example — have been able to address the problems fairly quickly.

Despite the backdrop of a weakening economy, there is a case to be made for optimism. For one thing, economists view unemployment data as a lagging economic indicator (though it’s easy to forget that investors try to use this measure as a way of telling the future).

In the opinion of Wells Fargo & Co. chief economist Sung Won Sohn, banks with consumer businesses can still count on these lines to buffer them against the downturn. “Consumer banking will continue to be a stabilizing factor and will lead the industry out of its slowdown,” he said.

“The economy bottomed out in midyear,” he said, “but we should give it another year at least” before expecting a resumption of prior growth rates.

Importantly, on the consumer side, when problems arise, they generally appear to be company-specific. That stands in contrast to the capital markets sector, where no company has been spared the impact of depressed equity markets and a corresponding dearth of underwriting deals.

Last week, for example, Providian Financial Corp., a credit card company that caters to the lower end of the market, warned that its performance for the rest of the year might fall below expectations in large part because its customers were cutting back on purchasing.

But card issuer MBNA Corp., without specifically mentioning Providian, said it was not experiencing similar problems. And Capital One Financial Corp., it might be noted, got an upgrade from Robertson Stephens just after Providian’s warning — a sign that analysts are still willing to judge companies in the consumer segment on their individual merits rather than as victims of an inevitable, broad-based decline.


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