Bank of America, Citigroup earnings disappoint investors
NEW YORK — Bank of America Corp.’s and Citigroup Inc.’s lackluster earnings led Wall Street to question how long it will take two of the country’s biggest banks to emerge from the shadow of the financial crisis.
While BofA’s fourth-quarter profit fell 63% and Citi’s climbed 25%, both disappointed investors who are growing impatient with the firms’ efforts to cleanse their books of problem mortgages and prune sagging businesses.
Both banks’ bottom lines sank under the weight of settlements and steep legal expenses that only seem to keep mounting as state and federal officials seek payback for the housing meltdown that led up to the financial crisis.
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“Not only are the companies growing tired, but the investors are as well,” said Todd Hagerman, a banking analyst at Sterne Agee.
“What is going to be the ultimate resolution?” Hagerman added. “They’re obviously struggling to put the legacy mortgage [problem] behind them — it’s been going on for four years now.”
Investors dumped shares of the two banks, which were among the most actively traded Thursday. BofA’s stock shed 50 cents, or 4%, to $11.28 a share; Citi’s stock lost $1.24, or 3%, to $41.24.
The big banks’ performance during the fourth quarter highlighted varying fortunes for the industry four years after the crisis.
Wells Fargo & Co. and JPMorgan Chase & Co. reported strong results, largely because of the boom in mortgages. Goldman Sachs Group Inc., the giant New York investment bank, also surprised analysts with strong fourth-quarter profit.
BofA’s problems stem mainly from its disastrous 2008 acquisition of Countrywide Financial Corp. of Calabasas, which had become the largest U.S. home lender by aggressively writing subprime and other high-risk loans.
The takeover made BofA the country’s No. 1 mortgage originator, with 22% of the market in 2009, according to trade publisher Inside Mortgage Finance. But after losing tens of billions of dollars on soured Countrywide loans, the bank retreated from the mortgage business and now has less than 5% of the market.
In the fourth quarter, BofA booked a $2.7-billion charge related to its recent settlement with Fannie Mae involving mortgages originated by Countrywide. The bank also had to swallow a $1.1-billion hit for its portion of a settlement reached last week among regulators and major banks over foreclosure abuses. The bank reported a further litigation expense of $900 million.
Net income was $732 million, or 3 cents a share, down from $2 billion, or 15 cents, a year earlier. Revenue fell 25% to about $19 billion on the bank’s legal settlements, sale of mortgage-servicing rights and accounting adjustments.
Among its many retrenchments, Bank of America stopped participating in two big parts of the mortgage business — using independent brokers to generate loans and buying mortgages from smaller lenders. It’s now focused on selling home loans through its own branches, mainly to customers it already has — a business BofA Chief Executive Brian Moynihan said was growing.
“Our retail mortgage production has increased by an average of 10% per quarter over the past three quarters,” Moynihan told analysts. “The pipeline today remains as strong as it was at the end of the third quarter.”
BofA cited improved results in its global markets operation, commercial lending and wealth management, the latter being mainly Merrill Lynch & Co., the brokerage it acquired in 2008.
At Citi, profit was dragged down in part by $1.3 billion in legal costs and related expenses. Of that, the bank said $305 million would go toward its share of the foreclosure settlement reached with regulators last week.
Executives declined to specify what accounted for the rest of those costs, but Chief Financial Officer John Gerspach said the Consumer Financial Protection Bureau has been “reviewing various consumer products” in the industry and is “currently reviewing us.” He declined to elaborate.
Also dragging on earnings: Citi released less of its reserves set aside to cushion the bank against loan losses. Citi freed up $86 million of reserves in the quarter, significantly less than the $1.5 billion released during the same period in 2011. Banks release reserves as their borrowers’ credit improves, making them less likely to default on their loans.
Citi earned $1.2 billion, or 38 cents a share, up from $956 million, or 31 cents, in the fourth quarter 2011. Excluding restructuring and other one-time accounting charges, Citi earned 69 cents a share in the fourth quarter — lower than what Wall Street analysts had estimated.
“To be clear, we’re not satisfied with these bottom-line earnings,” Citi Chief Executive Michael Corbat said in his first earnings call with analysts as CEO.
The quarterly results, Corbat added, don’t “yet reflect either the amount or caliber of earnings our shareholders expect and that our franchise is capable of. It will take some time to work through the challenges of the current environment to realize the potential.”
Corbat took over after Vikram Pandit abruptly resigned in October in a shake-up attributed to a long-simmering dispute with the bank’s board. Last month, Corbat announced more than 11,000 layoffs worldwide as part of a broader restructuring that included closing some offices in emerging markets.
Still, Citi showed some positive signs: Profits grew in trading, investment banking and consumer banking. The bank was able to pare losses in its lagging subsidiary Citi Holdings, a repository for much of the bank’s troubled mortgage assets.
BofA and Citi were the only “too big to fail” banks that needed two rounds of bailout funds from the government. Each received $25 billion in late 2008 as the financial system crashed, and then each got $20 billion a few months later.
BofA repaid the $45 billion in December 2009. Citigroup repaid $20 billion that same month, and the government sold off its remaining $25 billion in Citi securities over the following year, eventually turning a $12-billion profit.
Bruce Thompson, BofA’s chief financial officer, told analysts the recent settlements with Fannie Mae and regulators show the bank is making progress.
“We put a lot of risk behind us in 2012,” he said.
Some analysts seemed impatient, however.
Mike Mayo, banking analyst at Credit Agricole Securities, grilled the executives about whether resolution was in sight for ongoing litigation with mortgage insurers, and whether a pending $8.5-billion settlement with mortgage investors might fall apart.
Thompson said the bank had set aside a “pretty sizable amount” in reserve to cover its liabilities to the insurers and expected a judge to rule on the Countrywide mortgage-bond investors in the second or third quarter.
“We’re comfortable with our legal positions across the board,” Thompson said.
Asked how he would measure success five years into his new job at Citi’s helm, Corbat said: “We’ve got to get to a point where we stop destroying our shareholders’ capital.”
