Citi and Bank of America Show Better than Expected Earnings, but . . .
Bank Of America, Citi Results Show Hurdles Ahead
REUTERS
CHARLOTTE, N.C./NEW YORK (Reuters) - Bank of America and Citigroup posted better-than-expected quarterly earnings on lower credit losses, but their shares fell as the banks highlighted the challenge of boosting revenue in a stagnant economy.
Revenue is down from a year earlier and the banks, like their rivals, are grappling with how their business will be affected by the landmark financial reform bill passed by Congress on Thursday.
Executives at Bank of America Corp and Citigroup Inc said the impact of the bill is uncertain. Like JPMorgan Chase & Co on Thursday, they were unable to quantify the possible costs for their business.
Banks will have to eke out revenue and cut costs wherever they can and try to make up elsewhere any revenue losses from financial reform, said Nancy Bush, analyst at NAB Research.
"It's going to be this way for the next several years," she said. "It's an extremely tough environment."
The prospects for banks to lend more look bleak as U.S. unemployment hovers around 10 percent and a report on Friday showed consumer sentiment has slipped from a near 2-1/2 year high.
As with JPMorgan, which reported quarterly results on Thursday, Bank of America and Citi said investment banking profits were down, a bleak sign for Goldman Sachs Group Inc and Morgan Stanley, whose results are due next week.
Shares of Bank of America, the biggest U.S. bank by assets, fell 8 percent to $14.15 in midday trading on the New York Stock Exchange. Citigroup, which is No. 3 behind JPMorgan, slumped 4 percent to $3.99. Shares of No. 4 Wells Fargo & Co, which reports results next Wednesday, fell 4.8 percent to $26.48. The KBW Banks Index was down 4.5 percent.
RESERVES
Bank of America and Citigroup said credit costs broadly eased in the second quarter, allowing them to put less money aside against future losses.
"Both reports reflect a significant improvement in credit quality but little in the way of identifying how they're going to go from that to revenue growth," said Marshall Front, chairman of Front Barnett Associates.
Loans at Bank of America and Citi were down compared with a year earlier, and analysts and investors expressed concern about bank executives' comments that credit demand is still weak.
"Everyone's sitting on the sidelines," said Citigroup Chief Financial Officer John Gerspach, commenting on loan demand on a call with reporters. "I don't see a great deal of demand in the near term, at least until this uncertainty is removed."
To boost earnings without relying on reducing loss reserves, banks are likely to increase cost-cutting, Bush said.
Bank of America Chief Executive Brian Moynihan told analysts on a conference call, "Over the next several years, costs are going to be an issue for our industry, especially on the consumer side."
Costs related to delinquent loans and foreclosures have been rising, he said.
INVESTMENT BANKS
In recent quarters, banks have depended on their investment banking units to perform well, while their consumer business was hit by rising losses. Now, as consumer loan losses are less of a worry, trading revenue has suffered as stock markets were hit by a "flash crash" in the United States and sovereign debt worries in Europe.
Revenue at Bank of America's investment bank slumped to $6 billion in the second quarter from $9.8 billion in the first quarter. Citigroup also said its securities and banking revenue fell, down 26 percent from the first quarter to $6 billion.
These units were also hurt by a tax the banks paid on UK bankers' bonuses. The tax looks set to cost the five major U.S. banks with businesses in London about $2.5 billion in all.
Bank of America reported net income of $3.1 billion, or 27 cents a share, down from $3.2 billion, or 33 cents a share, a year earlier. Analysts had expected 22 cents a share, according to Thomson Reuters I/B/E/S.
Citigroup reported its second consecutive profitable quarter, posting net income of $2.7 billion, or 9 cents a share, down from $4.3 billion, or 49 cents per share, a year earlier. Analysts had expected 5 cents a share, according to Thomson Reuters I/B/E/S.
JPMorgan on Thursday reported a higher-than-expected second-quarter profit of $4.8 billion, up 76 percent from a year earlier.
Reporting by Joe Rauch and Maria Aspan; additional reporting by Elinor Comlay and Dan Wilchins; editing by John Wallace
Source: Reuters
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