The latest quarterly results from the ailing banking sector show major lenders appear to be healing, but with some business segments still weak amid a recession-mired economy.
On Friday, Bank of America and Citigroup reported healthy profits for the second quarter, although Citi’s results were skewed by a one-time gain that offset hefty losses.
Earlier in the week, JPMorgan Chase and Goldman Sachs beat market expectations with strong results, although they stemmed mainly from the institutional, or Wall Street side, of operations, with consumer segments still struggling.
Nonetheless, the sector seen as critical to an economic recovery showed marked improvement on the heels of a massive effort by the US government to steady the financial system that included capital injections of tens of billions of dollars.
Fred Dickson, analyst at DA Davidson & Co, said some banks “have enjoyed a nice uptick in investment banking but do not have to deal with the negative ramifications of mark-to-market accounting of derivative holdings that wreaked havoc on financial earnings over the last couple of years”.
But he said the troubles are not over in the finance sector.
“The process of unwinding sub-prime mortgage derivative swaps and other commercial derivative swaps hasn’t materially improved over the last three months but is now being overlooked by investors as the banks are simply not talking about them,” Dickson said.
Bank of America said it earned $US3.2 billion ($A3.98 billion) in the second quarter, down 5.9 per cent from a year ago but better than most forecasts.
That left shareholders with a profit of 33 cents per share, better than market expectations of 28 cents per share.
Revenues rose 60 per cent from a year ago to $US33.1 billion ($A41.12 billion), lifted in part by the acquisition of Wall Street brokerage Merrill Lynch.
Douglas McIntyre at 24/7 Wall Street said the results at Bank of America are “remarkable” considering that it was “forced into a horrible deal to buy Merrill Lynch”.
But he also noted that “the firm did indicate that credit quality continued to drop, a potential Achilles heel going forward”.
In a more mixed result, Citigroup said on Friday it earned a profit of $US4.3 billion ($A5.34 billion) in the second quarter, resulting from a big one-time gain on a joint brokerage venture.
But Citi also posted hefty losses from its real estate and trading operations as it continued to be battered by the global financial crisis.
Citi’s results rebounded from a $US2.49 billion ($A3.09 billion) loss in the same period a year ago, but the profit came from a one-time pretax gain of $US6.7 billion ($A8.32 billion), or $US11.1 billion ($A13.79 billion) before taxes, from creating the Morgan Stanley Smith Barney joint brokerage.
The deal closed on June 1 put Citi’s Smith Barney unit together with the trading division of Wall Street rival Morgan Stanley, with Citi getting cash as part of the deal.
Citigroup’s total revenues were $US30 billion ($A37.27 billion), up a sharp $US12.4 billion ($A15.41 billion) from the second quarter of 2008, due primarily to the Smith Barney gain.
John Carney at the financial website Clusterstock said Citi’s results excluding the Smith Barney deal would show a loss of 27 cents a share, slightly better than Wall Street estimates.
But he said the bank is still hobbled. “Citi’s loan portfolio continues to suffer. It has posted an additional $US3.9 billion ($A4.85 billion) to loan loss reserves.”
The number-three US bank in terms of assets, which needed special help from the government to weather the financial crisis, lost $US18.72 billion ($A23.26 billion) for all of 2008 before returning to the black with first-quarter earnings of $US1.6 billion ($A1.99 billion).
Citi, once the world’s biggest financial services firm, has received $US45 billion ($A55.91 billion) in bailout funds from the government in the form of capital injections.
In June, Citigroup finalised plans to convert its Treasury capital injection into common stock, a move that gives the government a major stake in the ailing banking group.
On Thursday, JPMorgan Chase provided more evidence of a recovering banking sector, posting a surprisingly strong quarterly profit of $US2.7 billion ($A3.35 billion).
Goldman Sachs shattered forecasts on Tuesday with $US3.44 billion ($A4.27 billion) in quarterly profit.
Yet the improving outlook for the sector is clouded by a potential collapse of large business lender CIT Group, which failed in its bid for a fresh government bailout and appeared headed for bankruptcy.