Today's Major Mega Banks Financial Results
Everyone seems to be keeping a close eye on the big mega banks to determine the future of the market-as well as the economy as a whole. The big banks were instrumental in the mortgage crisis and financial collapse; thus, their ability to re-structure under new regulations and still generate earnings is critical to economic growth, both in the United States and abroad. Recent reports from Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) indicate how others might go as the year proceeds.
Citigroup Earnings Miss
Citigroup has avoided much media attention, given the other big banks' more public embroilment in mortgage lending problems during the financial crisis. On January 16, 2014, Citigroup posted a gain of $.82 per share, which was significantly below the expected $.95 per share. As with other banks, rising interest rates helped lower revenues as people pulled back on buying new homes and refinancing existing homes.
Citigroup's investment banking arm fared better, underwriting a number of new public offerings and advising other companies on proposed mergers. The bank has not cut ongoing expenses very much, which would have helped profitability. However, international consumer loans are still a bright spot for the company.
This mixed picture of Citigroup's prospects makes it a dubious investment for the near term.
Goldman Sachs Earnings
Goldman Sachs has continued to be one of the premier names in banking, despite a number of problems related to the 2006 mortgage crisis, as well as the credit default swaps, which nearly took down the economies around the world.
The atmosphere of greater caution and stricter regulation has many wondering whether Goldman can generate earnings as it did in the past. The company's ability to beat forecasts has more to do with the money it invests for itself rather than the amount it invests for others. Goldman's equity investments in private companies were able to generate $1.4 billion in the 4th quarter. However, Goldman Sachs was hit hard by a sharp fall in bond trading revenues in the fourth quarter.
Earnings were $4.60 per share, while analysts had expected earnings of $4.24 per share. The 10 percent jump was partly due to a cut in compensation costs to their hard working employees in 2013. The partners continued to make huge salaries and bonuses.
Why Investors Should Exercise Caution With Mega Banks in 2014
Both Citigroup and Goldman Sachs are down significantly today on very heavy volume. Investors are well advised to watch each of the mega banking players to try to glean their future positions. The mega banks are staggering under settlements of cases, deriving from misdeeds and poor management during the mortgage crisis.
Citigroup is likely to see a continued drag on its earnings as it aligns itself with new regulations, which protect consumers and tighten controls on mortgage lending.
It is questionable whether Goldman Sachs will continue to be the moneymaking machine it has been past amid rising interest rates and tighter costly regulations. A number of opportunities are likely to open up for these bailed out mega banks, but investors should be cautious as the economy moves forward in 2014.
We believe that given today's results and market reaction that investors should continue to take some profits in the mega banks like Goldman Sachs, our Bank of America (NYSE:BAC) and Citigroup and reallocate the money to banks like U.S. Bancorp (NYSE:USB) which Goldman Sachs recently added to their conviction list, PNC Financial (NYSE:PNC) and Berkshire Bank (NASDAQ:BHLB) which we have recently rated as our top banking pick for 2014. See recent article here.
These financial institutions have good management, don't have the legacy issues of the mega banks and they pay their shareholders a solid and fair dividend.
Disclosure: I am long BHLB, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.