Wells Fargo Has Strong Earnings While Citigroup Falters

Earnings for Wells Fargo, Citigroup show banking's strengths and weaknesses.

Jan. 17, 2012 — -- Wells Fargo & Co. today reported a quarterly profit increase of 20 percent, in stark contrast to an 11 percent decline at Citigroup.

This morning's announcements were as different as night and day, Raymond James analyst Anthony Polini said.

Wells Fargo's earnings announcement was generally "positive" for the last three months of 2011. Its net income rose to $4.11 billion, or 73 cents per share, while revenue decreased 4 percent to $20.6 billion.

"Wells Fargo's great quarter bodes very well for regular banks, particularly if you have less exposure to market-related items or international businesses," Polini said, referring to global concerns such as the 2-year-old European debt crisis.

Polini said the San Francisco-based bank had strong growth in loans, deposits and credit quality.

CEO John Stumpf said in a statement, "I'm extremely pleased with Wells Fargo's performance in 2011, including strong deposit and loan growth, record cross-sell and record earnings. We achieved these results while completing the conversion of Wachovia's retail banking stores – the largest such conversion in banking history – and now all of our 6,239 retail banking stores are on a single platform serving customers coast to coast."

As the first traditional U.S. bank to report its fourth-quarter earnings, Wells Fargo might be an indicator of other banks without large exposure to investment banking, in contrast to Citigroup.

Citi's quarter was "ugly" and "messy," Polini said.

"More than anything else, Citi missed on market-related items, like trading, or the investment banking side of the business," he added. "The more traditional side of the business performed more in-line. The investment banking side was weaker than expected."

Citi had a profit of $1.16 billion, or 38 cents per share, on revenue of $17.2 billion, less than expected. Citigroup had a profit of $1.3 billion and revenue of $18.4 billion for the same quarter last year. The bank's full-year net income for 2011 was $11.3 billion, up 6 percent from $10.6 billion in 2010.

"Clearly, the macro-environment has impacted the capital markets and we will continue to right-size our businesses to match the environment," Vikram Pandit, Citi's CEO, said in a statement.

JPMorgan Chase, the first of the biggest banks reporting their year-end results, said Friday that fourth-quarter profit fell 23 percent but was in line with analyst expectations.

The largest bank by assets said in a statement that profit fell to $3.73 billion, or 90 cents a share, from $4.83 billion, or $1.12, a year earlier. Investment banking revenue declined by 30 percent as trading slowed because of the financial crisis in Europe.

With the relatively challenging year to banks' revenues, annual bonus and compensation might be the lowest in three years, analysts forecast. JPMorgan generally pays bonuses four to six weeks into its first quarter.

Investment bank Morgan Stanley will reportedly tell employees this week that bonuses will be capped at $125,000 for most bankers, the Wall Street Journal reported today.

Before the earnings announcement, David Konrad, analyst with investment bank Keefe, Bruyette and Woods, gave a lower forecast than consensus for the bank's earnings but gave it the highest of its three ratings Konrad expected 80 cents earnings per share, lower than the consensus of 90 cents.

Konrad called the earnings figures "a fairly soft quarter by their standards," but a lower tax rate and low investment banking pay-to-revenue-ratios, known as compensation ratios, worked in the bank's favor.

Konrad said JPMorgan is "top" in the universal bank space given its diversified business mix, strong balance sheet and near-term potential for a return on equity.

Jamie Dimon, CEO of JPMorgan Chase, said in a statement, "We believe these returns were reasonable given the environment, although the return for the fourth quarter was modestly disappointing."

Because of the extended European sovereign debt crisis, Keefe, Bruyette and Woods recently lowered earnings estimates at four of the universal banks, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.

In the third quarter, "dramatic volatility" negatively impacted bank earnings, including Goldman Sachs, which reported its second quarterly loss as a public company. Goldman Sachs will report its earnings Wednesday.