By Jason Simpkins
Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) each topped estimates with second-quarter profit. But these earnings & like those of Goldman Sachs Group Inc. (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) & belie the sharp deterioration in the banking sector that will pose a significant threat to financial firms throughout the remainder of the year.
Citigroup said it took in $30 billion in revenue in the second quarter, nearly $18 billion more than it generated the year prior. Second quarter net income totaled $4.3 billion, or $0.49 per diluted share.
Bank of America reported a $3.2 billion profit for the second quarter.
However, second-quarter results for both banks were bolstered by billions of dollars in one-time gains and strong performances in their trading operations.
Bank of America's bottom line was cushioned by a $5.3 billion pretax gain that came from selling shares of China Construction Bank. BofA still owns about 11% of China Construction Bank's common shares.
The firm, like rivals Goldman Sachs and JPMorgan, also reported a record trading profit and a pickup in banking fees. BofA reported $6.7 billion in trading profit and said banking fees, along with the acquisitions of Merrill Lynch and Countrywide Financial, helped boost revenue by 60% to $33.1 billion. That compares with $20.7 billion a year earlier.
Meanwhile, Citigroup generated an $11.1 billion pretax gain from the sale of its Smith Barney brokerage into a joint venture sale with Morgan Stanley (NYSE: MS). Citi said the Smith Barney gain was $6.7 billion after taxes.
But while Bank of America, JPMorgan, and Goldman Sachs were aided by an increase in investment banking fees, advisory and equity underwriting revenue at Citigroup plunged by 50% and 30% respectively.
Credit costs increased by $12.4 billion, as direct losses on loans totaled $8.4 billion and $3.9 billion was added to loan loss reserves.
"Our most significant challenge now remains consumer credit. Losses in our consumer businesses have been growing for some time, but we see some positive signs of moderation in those loss trends," said Citigroup Chief Executive Officer Vikram Pandit.
Bank of America's credit card business suffered as well. Its global card business lost $1.6 billion in the second quarter because of "weakening economies in the U.S., Europe, and Canada."
"All in all, our quarter comes down to mortgage and credit card losses," Citigroup's Pandit said on a conference call with analysts.
Those losses are likely to continue to pile on, however, as unemployment edges toward 10% and consumer spending sinks accordingly. Both banks have set aside billions of dollars to cover looming losses. Bank of America said it increased capital buffers by nearly $40 billion and Citi set aside $13 billion to cover current and future loan losses.
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