Citi and BofA fail to allay fears - Profits boosted by large one-off gains

Citi and BofA fail to allay fears - Profits boosted by large one-off gains
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2009
Published: July 17 2009 13:42 | Last updated: July 17 2009 18:32
http://www.ft.com/cms/s/0/72045088-72cc-11de-ad98-00144feabdc0.html


Citigroup and Bank of America, two of the biggest victims of the crisis, on Friday failed to dispel investor fears over their future after reporting second-quarter profits that were boosted by large one-off gains.

The lenders, which have been bailed out by US taxpayers and are under close regulatory scrutiny, continued to suffer from consumers’ financial woes and did worse than rivals such as Goldman Sachs and JPMorgan Chase in investment banking.

Citi, which is about to cede a 34 per cent stake to the US government, reported a $4.3bn profit compared with a loss of $2.5bn a year ago. Earnings were boosted by a $6.7bn gain from the partial sale of Smith Barney, Citi’s brokerage business, to Morgan Stanley. Without the gain, Citi would have been deep in the red and recorded its sixth loss-making period in the last seven quarters.

The poor financial health of US consumers continued to weigh on both Citi and BofA as losses in their credit card, mortgages and other retail lending businesses continued to mount. Citi incurred credit costs of $12.4bn during the quarter, including $3.9bn set aside to cover future loan losses. BofA had credit costs of $16.4bn in the three months to June.

Vikram Pandit, Citi’s chief executive, said the the consumer business was Citi’s “most significant challenge”, but added that there were signs “of moderation in . . . loss trends”.

John Gerspach, the new finance chief, who took over the job a week ago after the surprise move by his predecessor Ned Kelly to another role, said Citi had limited exposure to commercial real estate – the next problem spot in the financial system.

BofA managed to produce second-quarter earnings of $3.2bn thanks to one-time gains but its profits declined both from the previous quarter and a year ago.

The Charlotte-based bank recorded a $5.3bn gain from its sale of a stake in China Construction Bank during the quarter, and another $3.8bn gain on the sale of its share of a merchants payment company to a joint venture backed by an unnamed investor.

Excluding those gains, BofA would have reported a loss for the quarter. Investors seemed concerned about BofA’s inability to predict when the business would return to “normal”, sending the bank’s shares down 2.4 per cent in midday trading.

BofA’s mixed earnings results come at a time when the bank is struggling to repay $45bn in government bail-out funds, and digesting the acquisitions of Merrill Lynch and Countrywide.

Unlike the first quarter, when a strong showing by Merrill’s fixed income, currencies and commodities business bolstered BofA’s earnings, FICC revenues declined for the period. BofA said credit value adjustments on some of Merrill’s debt of $3.6bn accounted for decline in those operations.

Sales and trading revenue totalled $3.9bn, down from $6.3bn in the first quarter. Excluding a credit valuation adjustment, BofA’s sales and trading revenues were $6.7bn. The results of Citi’s investment banking unit were also below the stellar performances delivered by Goldman and JPMorgan earlier this week.