Friday, July 17, 2009

BoA Posts a Profit (so does Citi)

A Bank of America branch in New York. The bank's second quarter profit got a boost from big gains from its trading operations

July 18, 2009
Citigroup Reports Profit, Aided by Asset Sale

Citigroup, a banking giant scrambling to survive the financial crisis, reported a $4.3 billion second-quarter profit thanks to gains on its Smith Barney deal, though its primary banking businesses continue to suffer from rising credit losses.

The bank, propped up with $45 billion of taxpayer money since markets imploded last fall, recorded a $6.7 billion gain from merging Smith Barney into a brokerage venture with Morgan Stanley. Under accounting rules, Citi gets to mark up its entire stake in the venture, of which Morgan owns 51 percent.

The gain boosted net income to $4.28 billion, or 49 cents a share, compared with a year-ago loss of $2.50 billion, or 55 cents a share.

Quarterly revenue rose 71 percent to $30.0 billion, with the rise due almost entirely to the Smith Barney gain as well as net write-ups.

Credit costs increased to $12.4 billion, including an addition of $3.9 billion to loan loss reserves. That brings the total allowance for loan losses to 5.6 percent of total loans.

Shares of Citigroup are down 94 percent since peaking in May 2007 and have fallen by half this year, but they have tripled since financial services stocks began rallying in March. They were up 2 percent in premarket trade.

The bank is expected to soon complete a swap that will convert the United States government’s investment into a 34 percent equity stake in Citigroup.

July 18, 2009
Bank of America Posts a Profit on Trading Gains

Bank of America and Citigroup, giants that have come to symbolize the troubles plaguing the nation’s banking industry, announced Friday that they were once again turning handsome profits.

Bank of America reported a $3.2 billion profit for the second quarter. Citigroup said it earned $4.3 billion during the period.

But behind the figures was a sober reality: Those happy results were driven by billions of dollars in one-time gains — in the case of Bank of America, by profits from the sale of a stake in a big Chinese bank and, in the case of Citigroup, by a bonanza from a new joint venture for its Smith Barney division.

Without those one-offs, the banks, despite two taxpayer-financed bailout dollars apiece, would have lost billions.

Like Goldman Sachs and JPMorgan Chase, which stunned Wall Street earlier this week with robust earnings reports, Bank of America and Citigroup got big boosts from their trading operations.

But the pain being felt by hard-pressed American consumers hurt these giants even more. Both set aside billions of dollars to cover looming losses on consumer loans and warned that, given the tough economy, the road ahead could be rocky.

Still, the results exceeded analysts’ expectations. Bank of America announced earnings of 33 cents per share, while Citigroup reported earnings of 49 cents per share. The results at Citigroup far outstripped the 18 cent per share loss that analysts had predicted.

But both banks — the last of the big lenders that have yet to pay back their emergency bailout money from the federal government — sold significant assets during the quarter, cushioning their bottom lines. Bank of America’s results were enhanced by the $5.3 billion pretax gain from the sale of shares in the China Construction Bank. Citigroup formed a joint venture with Morgan Stanley for Smith Barney, resulting in an $11.1 billion pretax gain for the quarter.

While the results provided another sign that American banking industry is stabilizing somewhat faster than many had expected, they nonetheless underscored how the sagging consumer economy is hurting banks big and small. For the moment, trading and other traditional Wall Street businesses, such as securities underwriting, are powering profits at many big institutions.

At Bank of America, record trading profits of $6.7 billion and a pickup in investment banking fees lifted net revenue to $33.1 billion, up from $20.7 billion a year ago.

Bank of America also reported that it increased its capital buffers by nearly $40 billion by issuing stock and selling assets in a sign that it is preparing to absorb losses in its commercial and consumer loan businesses. Federal officials told the bank in May to raise at least $33.9 billion following stress tests conducted by bank examiners. Citigroup was told to raise $5.5 billion.

Still, analysts said before the report that Bank of America might need to buttress its capital further. The bank said that its global card business lost $1.6 billion in the second quarter due to “weakening economies in the U.S., Europe and Canada.”

“I think they will need to build billions of dollars of loan loss reserves this quarter,” said Jeff Harte, a banking analyst at Sandler O’Neill before the report was released. “It’s going to cost them significantly.”

The bank’s chief executive, Kenneth H. Lewis, acknowledged in a statement that “difficult challenges lie ahead from continued weakness in the global economy.”

At Citigroup, the chief executive, Vikram S. Pandit, echoed that view. “Our most significant challenge now remains consumer credit,” Mr. Pandit said in a statement. “Losses in our consumer businesses have been growing for some time, but we see positive signs of moderation in those loss trends.”

Both executives are widely seen being under considerable pressure. Controversy continues to swirl over Mr. Lewis’s decision to buy Merrill Lynch last December, a move he has said he was urged to make at the behest of federal officials. Mr. Pandit, meantime, has worked to mend strained relationships with federal regulators.

Both banks are deeply entrenched in traditional services like consumer and commercial lending, and as unemployment and wage numbers continue to worsen and households fall behind on bills, loan and credit card losses are piling up. Small corporations are increasingly defaulting on loans as the business environment remains stagnant — as evidenced by the turmoil at the commercial lender CIT. The outlook is murkiest at Citigroup, long considered to be in the worst shape along the major banks.

Direct losses on loans totaled $8.4 billion during the second quarter as the total amount of loan losses in addition to the reserves set aside jumped by 81 percent, to $12.4 billion. And while Bank of America picked up strong investment banking fees, advisory and equity underwriting revenues at Citi’s plummeted by 50 percent and 30 percent, respectively, since the same period a year ago.

Further bumps are at the end of the month, when Citigroup is expected to convert preferred shares to common stock, raising the government’s stake in the bank to 34 percent. Existing shareholders will be heavily diluted.

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