Both Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C) reported results this morning that were better than expected, but weakness in investment banking and demand for new loans is sending share prices lower.
JP Morgan Chase & Co. (NYSE: JPM) last night reported EPS of $1.09 on revenues of $25.6 billion. Analysts had been expecting EPS of $0.70 on revenues of $25.59 billion. Goldman Sachs Group Inc. (NYSE: GS
), Morgan Stanley (NYSE: MS), and Wells Fargo & Co. (NYSE: WFC) report second quarter earnings next week.
BofA’s earnings for the second quarter came in at $3.1 billion for EPS of $0.27, down from $3.2 billion in earnings a year ago and EPS of $0.33. Revenues fell from $33.09 billion in the same period a year ago to $29.45 billion this year. Analysts were expecting EPS of $0.22 on revenues of $29.75.
Citigroup reported EPS of $0.09 for the second quarter on revenues of $22.07 billion. Analysts were expecting EPS of $0.05 on revenues of $22.16 billion. For the same period a year ago, Citigroup posted EPS of $0.49 on revenues of $33.1 billion.
All three banks that have reported earnings got a boost from lowered loan-loss reserves. JP Morgan was able to reduce its reserves for bad loans by $1.5 billion, an amount CEO Jamie Dimon said that the bank does not consider earnings. Citigroup also got a $1.51 billion benefit from reducing its reserves, and BofA got a boost of $1.45 billion.
Lending is declining as a result of more stringent credit requirements and a lack of demand from business borrowers. Businesses are sitting on large amounts of cash, reducing their need to borrow. That need is further reduced by a lack of consumer demand for goods and services. There is no reason for a business to build more capacity when the capacity is has is already under-utilized. And even if a business wants to expand, chances are it can pay for the expansion itself or the bank’s lending requirements are impossible to meet.
On the investment banking side, JP Morgan saw a drop of 6% in investment banking net income. Citigroup’s investment banking revenues fell 36% sequentially. BofA managed a gain of $369 million in its investment banking business, some $60 million of which came from a pre-tax gain on the sale of one of its businesses.
Economic conditions remain uncertain, as do the effects of the financial reform bill recently passed by Congress. Continuing to drop loan-loss reserves to the bottom line is no substitute for real earnings. With three down and three to go, this earnings season doesn’t bode well for the country’s largest banks.
In morning trading today, JP Morgan is down about 3.5%, Citigroup is down about 3.7%, and BofA is down about 8%. For the banks still to report earnings, Morgan Stanley is off about 2.7%, Wells Fargo is down 4.7%, and Goldman is up about 2.4%, mostly due to the settlement Goldman reached yesterday with the SEC.
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