US earnings blunt hopes of recovery

US earnings blunt hopes of recovery
By Alan Rappeport and Simone Baribeau in New York
Copyright The Financial Times Limited 2009
Published: April 21 2009 13:49 | Last updated: April 21 2009 17:22
http://www.ft.com/cms/s/0/bbbfbbdc-2e6f-11de-b7d3-00144feabdc0.html


A raft of US companies reported earnings on Tuesday with results that highlight how difficult the first quarter of the year has been for businesses ranging from financials to industrials, amid the worst downturn since the Great Depression.

The banking sector continued to show signs of strain, dimming hopes that an end to the financial turmoil was imminent. Even after changes in accounting rules helped boost earnings at large US banks, including Citigroup and Bank of America, regional banks profits continued to suffer.

“Some of the smaller banks don’t have the scale to withstand the strains in credit markets and global economic pressures,” said Joseph Brusuelas, analyst at Moody’s Economy.com, speaking generally.

Bank of New York Mellon, the world’s biggest custodian of investor assets, said it was slashing its quarterly dividend as it reported profits fell by 51 per cent in the period and cut its dividend from 24 cents to 9 cents as it tried to bolster its capital base and take a step toward repaying Tarp funds.

But the BoNY results left some analysts concerned about how the bank would fare in the Treasury’s stress test results. “Given that they had the lowest [tangible common equity] ratio of all 19 banks subject to the upcoming stress test, we think it is unlikely that the government will allow them to repay the [Tarp’s Capital Purchase Program funds],” said Mark Fitzgibbon, director of research at Sandler O’Neill and partners.

Net income declined to $322m, or 28 cents a share, from $749m, or 65 cents, in the same period last year. The drop was worse than analysts had expected and came as fees and revenue fell 28 per cent in a volatile quarter for equity markets.

But the bank had some success rebuilding its capital base during the last three months, improving its Tier 1 capital ratio to 13.8 per cent from 13.3 per cent at the end of last year, and boosting its tangible common equity ratio – a measure of financial health – to 4.2 per cent from 3.8 per cent.

Earnings also suffered at US Bancorp, another large US regional bank. It reported a 50.8 per cent fall in first-quarter profits as it was hurt by higher credit costs, lower fees and more writedowns.

Net income at the Minnesota-based bank fell to $529m, or 24 cents a share, from $1.09bn, or 62 cents. Revenue ticked up by 0.2 per cent to $3.88bn, but a big increase in US Bancorp’s allowance for credit losses disappointed analysts.

“Credit costs continued to rise this quarter; an expected consequence of the weak economy and the primary contributor to the reduction in net income year-over-year,” Richard Davis, US Bancorp’s chief executive, said in a statement.

The disappointing earnings come as Treasury Secretary Tim Geithner told a Congressional oversight panel that evidence the bank bail-out had led to a credit thaw was ”mixed.”

Although banks have been at the centre of the recession, industrial companies such as Caterpillar, the world’s biggest maker of construction equipment, have been hit especially hard as the downturn spread to other parts of the economy.

The Illinois-based company reported its first quarterly loss since 1992 and slashed its outlook for the year. The loss of $112m, or 19 cents a share, was fuelled largely by the costs of massive job cuts imposed during the last few months. In January, Caterpillar cut 20,000 jobs, or 11 per cent of its workforce, as orders plunged.

Caterpillar’s revenue also fell sharply, declining by 22 per cent in the quarter to $9.23bn.

The company, seen as a bellwether for the US industrial sector, took some comfort in the fact that its losses were due to the one-time costs associated with the job cuts. Excluding those, Caterpillar earned $237m, or 39 cents a share.

Cutting its outlook, the company said it expected to earn 50 cents a share on $35bn in sales and revenues this year.

”We will take action to keep Caterpillar lean, while at the same time making strategic product and operational investments to position Caterpillar for long-term success when the economy does recover,” said Jim Owens, chief executive.

Meanwhile, Coca-Cola, the world’s largest soft drinks group, reported that its first-quarter profits were off by 10 per cent during the first quarter compared with the first three months of last year.

Coke’s net income declined to $1.35bn, or 58 cents a share, from $1.5bn, or 64 cents. The company’s results were in line with analysts’ expectations.

“While the global economic environment remains challenging, we are well positioned for long-term growth,” said Muhtar Kent, chief executive. “Our business was built for times like these.”

Coke’s revenue declined by 3 per cent to $7.17bn during the quarter, but sales by volume were up by 2 per cent.

In February Coke said it would raise its 2009 quarterly dividend by 8 per cent, making it the company’s 47th consecutive annual increase.