From Libor to Choked Margins, Big Banks' Summer Report Cards

Bankers can finally breathe a sigh of relief — but they better make it quick.

With Labor Day passed, big banks will try to put behind them an unusually eventful and scandal-ridden summer that prompted increased regulatory scrutiny and renewed debate over their size and utility. Stories about Libor fixing, money laundering and JPMorgan Chase's continuing fallout from its London trading losses have dominated the news, while bankers are also facing mounting internal industry challenges.

Yet it remains to be seen whether the next few months will be any better.

Though their profits and lending rose overall in the second quarter, banks are still scrambling to find sources of long-term revenue growth. The ongoing economic sluggishness and the European debt crisis still loom, the political rhetoric over banks' reputations is likely to heat up as the presidential election approaches, and the fallout from some of the summer's scandals is unlikely to disappear anytime soon.

"The core business of borrowing short and lending long — which in a healthy environment should be the real generator for profits — is still pretty weak," says Jason Ware, an analyst with Salt Lake City-based Albion Financial Group. "The recent Libor scandal has also been to some degree a bit of a wound, just in terms of perception."

Below are summer report cards for the biggest banks, assessing what they weathered this summer and what their biggest challenges will be in the months ahead.

JPMorgan Chase (JPM)

What It Did This Summer: It was almost all London Whale, all the time at the nation's largest bank, as Chief Executive Jamie Dimon tried to clean up his bank's nearly $6 billion trading misstep. JPMorgan still managed to report profits of nearly $5 billion in the second quarter, and a management shake-up in late July sent the message that the bank is ready to move on. But at the same time, former Citigroup CEO Sandy Weill made a rather stunning reversal by calling for the separation of large companies' commercial and investment banking functions — shining a spotlight directly on JPMorgan Chase, which offers both types of business, and on former Weill protégé Dimon.

What to Watch for This Fall: The megabank breakup debate is probably not going away anytime soon, especially before the November elections. This fall could see a reprise of the anti-bank populist anger voiced by Occupy Wall Street, which is planning a day of protests and attempted "citizens' arrests" of bankers in New York on Sept. 17.

Dimon has been famously outspoken on political issues in the past, but analysts say they expect him and other big bank CEOs to stay relatively quiet in this election cycle.

"JPMorgan's best [move] would be to focus on handling their recent issues. … It's rebuilding their credibility that they need to focus on," says Alan Villalon of Nuveen Investments.

When it comes to the election, "at this point the banks want to keep a lower profile," he says. "They'll keep their sides, but I don't think they'll want to be outspoken against one side — it could set them up poorly for the next four years" if they voice support for one presidential candidate and the other candidate wins.

Bank of America (BAC)

What It Did This Summer: Pretty much nothing — at least as far as bad news goes. Remember last August, when CEO Brian Moynihan agreed to subject himself to that extraordinary conference call defending his own performance? This summer, even considering its supporting role in Libor-gate, B of A has managed to largely avoid the headlines.

"They learned. They're doing what they need to be doing," says Villalon, whose company owns shares of B of A and other large banks. "They're focused on getting their capital base up and trying to get some expense controls in place, and trying to navigate the low-interest rate environment."

What to Watch for This Fall: That isn't to say that Bank of America is in the clear. Mortgages continue to be a thorn in the bank's side; a preliminary report released last week highlighted Bank of America's relatively slow pace in starting the loan modifications required by the national mortgage settlement. And B of A should brace to have its name potentially invoked by Occupy and other protestors as the campaign season continues heating up.

Citigroup (NYSE: C)

What It Did This Summer: Like a merry ghost of Citigroup Past, Sandy Weill's comments about the separation of investment and commercial banking invoked all of the crisis years that current CEO Vikram Pandit has spent his tenure helping the bank overcome. Citi took more steps in shedding that baggage this summer, last week agreeing to pay $590 million to settle a longstanding shareholder lawsuit over the bank's disclosures of subprime mortgage exposure before the crisis. The Federal Reserve also recently approved a revised capital plan for this year, after slapping down Citigroup's initial plans.

What to Watch for This Fall: Pandit has to continue trying to sell or wind down Citigroup's remaining unwanted "Citi Holdings" assets. Part of that involves waiting for an arbitrator to give Citi and Morgan Stanley (MS) a valuation of their Smith Barney joint venture, which should allow Morgan Stanley to buy more of the business. And the bank has to decide what sort of dividend raise or buyback plan — if any — it dares propose next year, when it submits its 2013 capital plan to the Fed.

Wells Fargo (WFC)

What It Did This Summer: The fourth-largest bank continues to benefit from a reputation of being "relatively healthy overall," in the words of analyst Ware, and to reap the profits of a mortgage refinance boom. But its massive mortgage business has also drawn Wells into the resurgent too-big-to-fail debate, as analysts and regulators question the potential side effects of having one bank originate a third of all U.S. home loans. On the regulatory side, Wells also agreed to pay $175 million to settle a three-year-long Justice Department investigation into its fair-lending practices.

What to Watch for This Fall: Wells, like several other banks, is bracing for an eventual slowdown in refi-driven mortgage business. Chief Financial Officer Timothy Sloan told American Banker in July that the bank had "a good pipeline" of refis in process, but Wells will eventually have to find alternatives for revenue growth in the current sluggish environment. The bank is also looking for silver linings to the European debt crisis, by shopping for loan portfolios or other assets that European banks are shedding.