What Big Bank Earnings Say About the Economic Recovery

Jan. 20, 2010 1:33 PM ETJPM, BAC, C5 Comments
Daryl Montgomery profile picture
Daryl Montgomery

In its recent earnings report, JP Morgan (JPM) revealed that it had a bigger loss in its retail financial services division in the fourth quarter of 2009 than it did at the height of the Credit Crisis in Q4 2008. Bank of America (BAC) and Citibank (C) earnings reports for last quarter also indicate that their lending and consumer credit operations remain troubled and that a U.S. economic recovery has yet to take place. The banks are only making money from their investment banking operations and this has offset major losses from lending activities - the core business for any bank.

The loss for JP Morgan in its retail financial services division (which includes mortgages) was $399 million in Q4 2009. The bank lost $306 million in its credit card division, and this number would have been even worse if there hadn't been a payment holiday during the quarter. JP Morgan's provision for credit losses was $7.28 billion last quarter. Despite the steep losses in its lending arm, JP Morgan still reported earnings of $3.28 billion or 74 cents a share.

Unlike JP Morgan, Bank of America didn't report positive earnings, but said it lost $5.2 billion or 60 cents a share in the fourth quarter. The bank charged off $8.4 billion in bad loans. While this indicates a severely damaged loan portfolio, it was $1.2 billion lower than in the third quarter. Credit Card losses were $1.03 billion and these were much higher than in the fourth quarter of 2008. Investing banking earnings were up and this kept the reported losses from being much worse.

Citibank also reported a loss in the fourth quarter, 33 cents versus a loss of $3.40 a year ago. Its revenue from trading and investment banking was up 5.9%. There was a loss of $2.33 billion in it local consumer lending operations. As bad as this was, it was still better than the $4.89 billion loss in the fourth quarter of 2008. Net credit losses for the bank were $7.13 billion versus $7.97 billion from a year earlier. Citibank added $706 million to its loan loss reserves.

Earnings for the big banks indicate that the U.S. economy is still in severe recession. Their lending operations are still experiencing massive losses and in some cases these have gotten worse than during the bleakest days of the Credit Crisis. Earnings have been held up through investing banking operations, which in turn have been helped by changes in accounting rules. Illusions can only work for so long for financial companies, however. Investors seem to have quickly forgotten what happened to Bear Stearns in 2008. It was about to report positive first quarter earnings before it went under in March of that year. It had an $18 billion funding reserve and claimed it was solvent right up to the end. Even though the company had a reported book value of around $90 dollar a share (the number was slightly different depending on the source), the U.S. government valued it at $2 a share in the takeover it arranged with JP Morgan.

Apparently, the real numbers can be much worse than the reported ones for U.S. financial firms and investors should keep this in mind.

Disclosure: None

This article was written by

Daryl Montgomery profile picture
Daryl Montgomery is the organizer of the New York Investing meetup, a 8,000 member educational group that provides the public with unbiased stock, bond, currency and commodity market information. For details, see: http://ow.ly/Y6CNhT (it's free to join). The group is the largest investing meetup in the world. It holds monthly general meetings, offers small classes on investing topics, has webinars and provides individual tutoring. Montgomery, a former professor and expert witness in court cases on data reliability (up to the Supreme Court), has written a number of books on investing and 800+ articles on financial topics. He was formerly the chief blogger for the "Helicopter Economics Investing Guide". He has done extensive research on optimal use of technical indicators. Montgomery has never worked for, nor has any association with any Wall Street company and this allows him to bring an independent perspective to market analysis.The New York Investing meetup's strength is in calling market turns. It called the top in gold and silver in March 2008 and the exact day of the oil bottom in February 2009 and almost the exact peak price in Silver in 2011. The New York Investing meetup now has a monthly market newsletter that provides a global analysis of stocks, bonds, currencies, and commodities. It can be purchased on a monthly basis.

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