Earnings Notwithstanding, Citigroup and BofA Have Two Different Stories to Tell

Earnings this past week from Citigroup (C) and Bank of America (BAC) reveal that there’s still trouble brewing in the consumer lending space. While Citi reported a $1.9 billion loss on income from credit cards and consumer loans earlier in the week, Bank of America announced Friday morning that the brunt of its $2.2 billion third-quarter loss was for the same reason.

But while the results may invite comparisons between the two banks, there are significant differences between Citigroup and Bank of America.

Last month, I pointed out that after a relatively smooth year, BofA would face significant earnings pressure from its consumer lending and credit card operations this quarter (see story here). The bank is the second largest credit card issuer in the U.S., after JP Morgan (JPM). Naturally, it is no help to BofA that its chief rival in that space is government aid-free and had record trading profits to offset its own consumer loan losses.

By comparison, Citigroup actually saw a decline in net credit losses, beefed up its cash position by 17 percent, to $244 billion, and eked out a profit from its trading operations to post a $100 million quarterly profit overall.

My BNET Finance colleague Alain Sherter is more critical of Citi:

Although Citi reported a net profit of $101 million, down from $4.2 billion in the previous quarter, for common shareholders the company lost $3.2 billion, up from $2.9 billion in the year-ago period. Return on equity was -12.2 percent, down from 14.8 percent in the second quarter and right back where the company was at this time in 2008. Net interest revenue, a measure of how much Citi has to lend when factoring in funding costs, fell 10 percent.

… No, the real story here is Citi’s $8 billion in credit losses for the period. That’s down slightly from the previous quarter, but we’re still talking about a crater-sized hole. These losses are mostly walled up in its Citi Holdings unit, which is a little like the attic where crazy uncles get locked away. Including the smell.

While I agree with Alain that Citi Holdings is a bit of a messy storage space right now, this point of view discounts Citi’s formidable and largely strengthening investment banking operations, which seem to be playing more of a central role in the firm’s future, as evinced by the division of accounting results between Citicorp and Citi Holdings in the second fiscal quarter (see story here).

The same cannot be said for BofA, which is much more dependent on its income from consumer loans and credit cards than Citi is. On top of that, Merrill Lynch, BofA’s ill-advised investment bank acquisition, reported a steep decline in income from its wealth management unit. BofA Merrill has lost more than 1000 brokers, or 6 percent of its financial advisors since the takeover last year.

With a market value of $150 billion, Bank of America is 50 percent more expensive than Citigroup right now. Unlike the latter however, there have been scant signs of growth in domestic or (more importantly) in foreign operations at the bank this year. In the past 3 days, the market has punished Citi by 8 percent in value, and Bank of America by 6 percent, inviting comparisons between the two.

Time will likely tell that those comparisons will be short-lived.

Comments

[Hmm?!:]

In the end. Maybe they both go down.

Oct 19 09:09 AM

[DonFurio:]

My prediction, BAC goes to 30 by 2011 and C goes to 10 by 2011 far outpacing the gains in the SPY.


On Oct 19 09:09 AM Hmm?! wrote:

> In the end. Maybe they both go down.

Oct 19 12:52 PM

[bbro:]

Another meaningless analysis...BAC is to date 15 billion dollars ahead
of adverse stress test assumptions....at least 20 billion of TARP will be repiad soon....

Oct 20 06:29 AM