Bank of America, Citigroup post profits, beating forecasts
CHARLOTTE -- Bank of America and Citigroup became the latest big banks with better-than-expected earnings.
• Bank of America bac on Friday reported a $2.42 billion second-quarter profit even as losses from failed loans continued to rise.
• Citi c announced a $3 billion second-quarter profit instead of the big loss analysts expected.
BofA trading business improves
Bank of America said its earnings after payment of preferred dividends were down at 33 cents a share compared with a profit of $3.22 billion, or 72 cents a share, a year earlier. The earnings beat the forecasts of analysts surveyed by Thomson Reuters, who forecast Bank of America would earn 28 cents a share.
Revenue rose to $32.77 billion, slightly below analysts' forecast of $33.1 billion.
In a statement, CEO Kenneth Lewis warned that "continued weakness in the global economy, rising unemployment and deteriorating credit quality" would affect the company for the rest of this year and next. That echoed the view taken Thursday by JPMorgan Chase executives who also reported continuing loan problems even as their company had strong second-quarter earnings.
Bank of America said its results also reflected a gain from selling part of its stake in China Construction Bank. They also included $713 million of dividend payments tied to a federal bailout, and a charge to bolster a federal deposit insurance fund.
Bank of America, like Goldman Sachs Group and JPMorgan Chase, said it had a handsome profit from its trading business. The company acquired Merrill Lynch early this year.
But, like JPMorgan, it did report continuing losses from failed loans. Bank of America said it recorded a $13.4 billion provision for loan losses during the second quarter as consumers struggled with debt amid rising unemployment.
Troubled loans, or non-performing assets, increased to $31 billion from $9.75 billion a year ago. The bank also lost $1.6 billion on card services, after posting a profit a year ago.
The company also said its mortgage revenue rose following its acquisition of lender Countrywide Financial, reflecting the refinancing boom triggered by lower mortgage rates.
During the quarter, the government told Bank of America it needed to raise $33.9 billion in additional capital to strengthen its finances in the event of a further deterioration in the economy. By late June, the bank had raised $38 billion.
The bank has received $45 billion in bailout funds as part of the Treasury Departments $700 billion financial rescue package. It's not known when it will repay the government.
Citigroup benefits from Smith Barney sale
After paying preferred dividends, Citi earned $3 billion, or 49 cents a share. It lost $2.59 billion, or 55 cents a share, during the same quarter last year.
Analysts forecast a loss of 37 cents a share for the quarter.
The bank recorded an after-tax gain of $6.7 billion on the sale of a majority stake in its Smith Barney brokerage unit. It also said some of its assets that had plunged in value during the credit crisis had recovered somewhat, giving the bank a gain.
Citi's profit was not driven by improved trading like other banks, and instead came from the gain on the sale of its Smith Barney unit and the increasing values of some of its riskier assets that had plunged during the credit crisis. The bank recorded an after-tax gain of $6.7 billion on the sale of a majority stake in its Smith Barney brokerage unit to Morgan Stanley.
Citi has been among the hardest hit by the credit crisis and ongoing recession. It has received $45 billion in funds from the government and guarantees to protect against losses on more than $300 billion in risky assets. The government is in the process of acquiring a 34% stake in the bank as part of a broader debt exchange program.
The exchange program will provide Citi a better mix of capital to withstand additional loan losses and further weakening in the economy. By turning preferred shares into common stock, Citi also no longer has to pay out dividends on the preferred shares, thus helping improve its cash flow.
Like other large retail banks, Citi is still facing mounting loan losses as the recession continues. Citi set aside $12.68 billion to cover loan losses during the second quarter, compared with $7.1 billion during the year-ago period.
Trying to better manage the mounting losses and return to profitability, Citi took a radical step to realign its operations in January, splitting its operations into two entities. After suffering a fifth-straight quarterly loss during the last three months of 2008, Citi split its operations into Citicorp and Citi Holdings. The first is focused on traditional banking around the world, while the second will hold the company's riskier assets and tougher-to-manage ventures.
The move allows it to more easily sell off those riskier assets and keep their losses separate from the traditional businesses — the operations where Citi is now squarely focused.
Citi Holdings generated an operating profit of $1.36 billion during the second quarter, compared with a loss of $5.23 billion thanks to the gain on the Smith Barney sale. Citi Holdings also recorded an increase of $1 billion in the value of some of its risky assets, primarily related to subprime mortgages. The value of those same investments was cut by $6.6 billion during the same quarter last year.
A collapse of the housing market in 2007, primarily due to rising defaults among subprime mortgages, was one of the primary causes of the credit crisis and recession.
At Citicorp, operating profit fell 11% to $3.06 billion during the second quarter. The decline was primarily the result of foreign currency exchange and rising credit losses.