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Citigroup, Bank of America report profits but face challenges, analysts say

NEW YORK — The big banks are making big money again, but they won't be healthy again as long as they have to deal with a recession and customers who are defaulting on mortgages and credit cards.

The impressive numbers include a $3 billion second-quarter profit for Citigroup and a $2.4 billion profit for Bank of America, both announced Friday. They follow similarly robust earnings for Goldman Sachs and JPMorgan Chase.

That the banks managed to turn a profit at all is remarkable. Just 10 months ago, many of them looked to be on the verge of collapse. The stock market staged a huge rally this week, driven by the signs of health in banking.

But Bank of America CEO Ken Lewis had some sobering words during a conference call with Wall Street analysts after his company's results were released Friday: "Profitability in the second half of the year will be much tougher than the first half."

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading — not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage.

Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do.

Bank of America, JPMorgan Chase and Citigroup Inc. all reported that they lost more money on loans during the second quarter. Bank of America alone set aside $13.4 billion to cover loan losses. But the banks also saw signs that loan delinquencies were starting to stabilize.

Celent analyst Isabel Schauerte said Bank of America's earnings tell the story of the financial industry.

"B of A's results are the bellwether of where Main Street is headed. Measured by credit losses, a moderation of default rates is not in sight," Schauerte said. "For the investment banking business of B of A, in contrast, the worst days seem to have passed."

The banks that reported earnings this week cited similar trends:

Mortgages: Bank of America's second-quarter revenue was bolstered by a spike in mortgage refinancings as interest rates tumbled early in the quarter. But rates have been climbing, and analysts expect that surge in refinancings to taper off. And more people are defaulting on mortgages.

Credit cards: Credit card losses tend to track the unemployment rate, and banks are expected to keep losing money on credit cards as more people lose their jobs.

Investment banking: By far the quickest recovery in the banking business has come in the investment banking sector. Some of the rebound came from the big stock market rally this spring.

Commercial real estate: While home foreclosures are increasing, the commercial real estate market is expected to keep causing loan losses for banks. Rising store and office vacancies are cutting into landlords' and developers' cash flow, and leading them to default on their mortgages.

Citigroup, Bank of America report profits but face challenges, analysts say 07/17/09 [Last modified: Friday, July 17, 2009 11:01pm]

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