Seeking Alpha
Banks, long-term horizon
Profile| Send Message|
( followers)  

The siren was sounded earlier this month: Growing Concern over Big Bank Profits in Third Quarter and Beyond.

The third-quarter results of JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co. (NYSE:WFC) basically confirmed the changing expectations.

Now, Citigroup (NYSE:C) can be added to the growing list of large banks that are posting less than stellar results. And, the results are very consistent with the results posted by JPMorgan and Wells Fargo.

That is, the basic banking business of these giant organizations is not doing that well and the special events that have boosted earnings over the past two years or so are proving difficult to sustain.

Revenues, excluding debt valuation adjustments and a prior-year charge related to the Smith Barney sale to Morgan Stanley, dropped 4.9 percent to $18.22 billion for the third quarter of 2013, down from $19.16 billion a year earlier.

Revenues at JPMorgan were down 7.7 percent, year-over-year, and were down by 3.5 percent, year-over-year, at Well Fargo.

The headline grabbing item was that fixed income trading was down substantially. In fact, year-over-year, fixed income trading was down 26 percent and was down 17 percent from the second quarter of this year.

Also, "As with Wells Fargo and JPMorgan, Citi's results were hurt by lower mortgages originations than in the second quarter as the refinancing boom that boosted profits last year continued to wane." This quote is from The Wall Street Journal article linked above.

Three other factors contributed to the Citicorp performance, and are not connected with its sustainable banking business. One, we have the "standard" loan-loss reserve release common to most big banks these days. In the third quarter, this release amount to $675 million, which certainly helped overall performance.

Secondly, the new Chief Executive Officer of the organization, Michael Corbat, continues to whittle away at expenses. Third-quarter expenses were down 3.6 percent from a year earlier.

Third, losses in the Citigroup division that holds distressed assets-Citi Holdings-were substantially less this year than last year. Last year there was a large charge connected with the sale of Smith Barney brokerage to Morgan Stanley.

One can see that Citigroup, JPMorgan Chase, and Wells Fargo are still going through some of the same motions. Not a whole lot is happening in the basic banking business of these institutions. Revenues being generated by the fundamental core of the banks are actually declining, year-over-year. Net interest margins are decreasing.

Net income, however, is rising and it is rising because of expense control, loan loss reserve releases, and smaller losses in non-banking areas.

It is expected that the quarterly profit results in the other large banks will be of a similar nature.

Commercial banks are making profits. It is just that their return on equity remains around 10 percent or lower and most of the earnings are coming from areas that are not sustainable. Hence, I continue to be skeptical about the banking industry and await the time when the larger banks can show real progress in bank lending and the profitability of the fundamental banking business.

Source: Citigroup: And The Beat Goes On