Bank of America, Citigroup Ignite Hope for U.S. Banking Industry

By Jennifer Yousfi

Bank of America Corp. (BAC) shares soared Monday as it followed Citigroup Inc.’s (C) lead to become the fourth large domestic bank to beat Wall Street’s earnings expectations and provide hope that the battered banking industry might finally be leaving the worst of the subprime mess behind.

Bank of America shares were up an even $2, a gain of over 7%, to trade at $29.49 at 1:30 p.m. in New York before dropping back to close at $28.52 Monday.

The share gains came after the Charlotte-based Bank of America announced that second-quarter profit dropped 41% to $3.41 billion or 72 cents per share from $5.76 billion, or $1.28, from the same period the year prior. Despite racking up its fourth consecutive quarter of declining profits, earnings beat analyst expectations.

Bank of America joins other large U.S. banking industry firms such as JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Citigroup in topping expectations for the second quarter.

“It suggests the credit crisis isn’t as bad as people thought” for lenders, Steve Roukis, managing director at Matrix Asset Advisors Inc in New York, which invests $1.4 billion, told Reuters. “A week ago there was tremendous fear about systematic risk to the system. There’s definitely a floor here.”

Global View Sets Citigroup Apart

Citigroup shares have climbed almost 30% in the past five trading days, after the stock battled back from historic lows to close at $19.69 Monday. Citigroup’s $2.5 billion second quarter loss, reported late last week, was a victory for the struggling commercial bank on two fronts:

• Citigroup’s loss was smaller than the $3.67 billion that analysts’ had expected and accounted for another $7.2 billion in asset write-downs.

• Citigroup reported it was adequately capitalized and would not need to seek further emergency capital infusions, which means shareholder equity will not need to be diluted further.

“Investors are happy that the write-downs are under control,” Stuart Plesser, the banking analyst at Standard & Poor’s Equity Research told The New York Times. “That’s what’s driving Citigroup’s price now — their write-downs.”

But don’t expect all banking industry firms to be so lucky. Citigroup may prove the exception, not the rule when it comes to future capital raises.

“You don’t want to jump into the financial sector until you know how much capital needs to be raised, and that’s going to restrain the overall market from moving higher,” Art Hogan, chief market analyst at Jefferies & Co., told The Associated Press.

Part of the reason for Citigroup’s success is its extensive overseas operations. More than half of Citigroup’s 8,300 retail branches are outside of the United States, The NY Times reported. International diversification should help to cushion Citigroup better than some of its more domestic-focused banking industry rivals.

“International has not yet shown the same cracks we’ve seen in North America,” David Jiang, a credit research analyst at Barclays PLC, told The NY Times. “If we start to see a similar level of deterioration, it’s just another problem the banks have to contend with.”

Comments

[Emerald]

For all the bad mouthing of Citi (and it deserved most of it), Pandit is quckly selling assets, putting new people in place and could turn this ship around in three years. Patient money could have an average 20-25% annual return, excluding dividends in 2011. Some risk, big reward. Time to start dollar cost averaging into "C".

[drmalaka]

Losses are directly correlated to operating income. These banks are in complete control of their writedowns. The numbers are fixed, if they expect to have a seven billion loss and have one billion in earnings then they write down 7 billion. If they have five billion in earnings then they write down 11 billion. Each creates a billion beat on estimates.

They have enough writedowns for the next three years, they will continue to manipulate their earnings releases based on how low they can give guidance and then beat it by a billion.