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Size Counts: Small Banks Are King, The Big Guys Still Have Lots of Problems, Says Whalen

Stacy Curtin

Profits are way down for two of the three biggest U.S. banks which have reported fourth quarter earnings so far.

JPMorgan Chase reported a 23% drop in profits last Friday due to a very slow investment banking unit as investors have grown risk averse amid worries over the European debt crisis. Citigroup reported an 11% drop in profits on Tuesday.

However, Wells Fargo, the fourth largest U.S. bank, beat earnings expectations with a 20% rise in net income compared to the same quarter in 2010.

The one big takeaway from the three aforementioned banks is weak revenue, says Chris Whalen senior managing director at Tangent Partners and vice chair at Institutional Risk Analytics. "We've been telling this story for the last couple quarters," he says. "Down revenue [and] better—than-expected earnings on shrinking volumes."

Ahead of the bell Wednesday, Goldman Sachs reported better-than-expected earnings of $1.84 per share but revenue was far less than expected at $6.05 billion. (Stay tuned for more coverage. William Cohan, author of Money and Power, joins us to discuss Goldman Sachs earnings later this morning.)

But the story at Wells Fargo is a bit different. "I think the story at Wells Fargo is about cost cutting," Whalen tells The Daily Ticker's Aaron Task, referring to the bank's ambitious 2011 initiative to cut technology and operations costs by $1.5 billion.

In doing so, Wells Fargo, not unlike other banks, has taken to job cuts. The entire banking industry cut upwards of 130,000 in 2011, according to Reuters.

As for Bank of America, which reports Thursday morning, it is going to be "a funeral," Whalen predicts in his typical no-holds barred style.

"That bank is in a lot of trouble," he says. "When I look at what is going on at BA in the secondary market for bad assets, this bank is trying to raise cash everywhere it can."

Among the big four consumer banks, Whalen believes Wells Fargo is the top performer and best stock pick. Beyond that, he has his eye on smaller banks like BB&T. The risk-adjusted returns on such banks start getting really attractive, he says emphasizing their double-digit returns and relatively clean balance sheets.

"The big guys still have issues to deal with at least for the next couple years," says Whalen.