Citi’s Struggles Continue

Following in footsteps of JPMorgan Chase (JPM), Citibank (C) today reported a net loss of $1.6 billion for 2009 on losses in mortgage and credit card lending that more than offset gains in the bank’s investment banking division. While JPMorgan was able to post earnings of $11.7 billion for the year, the problems in its consumer businesses are indicative of a serious problem facing all the big banks. That pattern is likely to put additional pressure on Bank of America (BAC) and Wells Fargo (WFC) shares, which still have to report fourth-quarter and full-year earnings.

Citi’s loss is far better than its 2008 full-year loss of more than $27 billion, but its decision to repay the federal government more than $10 billion in the fourth quarter doomed the bank to another annual loss.

So why did Citi, Bank of America and Wells Fargo repay the TARP funds now when it would do no good for bottom line numbers?

They did it for two, not-very-good reasons. First, because JPMorgan and Goldman Sachs (GS) did it. The other banks could not afford to sit back and take a chance that the market would view them as weak sisters.

Second, the banks wanted to get out from under restrictions on bonuses. The banks argue that in order to retain their best performers, they must be able to match the enormous bonuses paid by their competitors. Otherwise, the talent will leave.

The first argument is akin to the reason that your kids give for wanting to do some outrageous thing: everyone else is doing it. The second argument is based on the belief that an employee who gets multi-million dollar bonuses can pick and choose among employment opportunities in the current environment. That reasoning is dubious at best.

But, again, everybody’s doing it. Bank of America and Wells Fargo did the same thing as Citi, and the consensus estimates for Bank of America project a full-year net loss of 10 cents a share. Wells Fargo is expected to post a net gain of $1.68 a share for 2009.

Another issue weighing on bank shares is the drive for new, tighter regulations. The recent proposal to levy a payment of 15 basis points on bank balance sheets to repay about $120 billion in federal bailout funds has everyone scurrying around trying to figure out what the government will do next.

The uncertainty will continue to weigh on bank profits because even good performers, like Goldman Sachs, could take a hit from new requirements for capital reserves and position limits.

So far banks have indicated that they intend to fight rather than switch. That may not be a winning strategy. It might be better to settle for some higher capital requirements and greater transparency in exchange for some certainty about what the rules are going to be.

Poor performance in mortgage and credit businesses, TARP paybacks, and uncertainty about new regulations are very likely to tamp down earnings at both Bank of America and Wells Fargo. Share prices are likely to fall sharply, and recovery could still be a long way off. Not a rosy outlook.

Related Articles:

• Risks Abound if Citi Repays TARP Too Fast
• Bank of America (BAC): The Chosen One?
• Citigroup’s Offering a Blueprint for TARP Players to Avoid