It was a case of winners and losers in the fourth-quarter earnings reports from US banks, indicating that some just cannot shake off the financial crisis. While JPMorgan and Goldman Sachs reported solid earnings, Citi came in below analyst estimates and Bank of America Merrill Lynch’s revenues were lower than last year.
Citi reported earnings of $1.2 billion for the fourth quarter of 2012. Excluding one-off factors related to restructuring and accounting for outstanding debt, the bank earned 69 cents a share, much lower than analysts had forecast. A Bank of America research note called the Citi results “a big miss”. Its disappointing earnings were attributed to a weakness in FICC trading – that brought in $2.7 billion in revenues in the fourth quarter, down from $3.7 billion in the third quarter. Citi also had a greater than expected increase in loan-loss provision and higher expenses. Legal costs were $1.3 billion. Michael Corbat, in his new role as chief executive, said: "It will take some time to work through the challenges of the current environment, but realizing our core earnings potential, as well as improving our returns on assets and tangible equity, are critical goals going forward.”
Bank of America Merrill Lynch also suffered from high legal expenses. In the fourth quarter, the bank noted a $2.7 billion charge related to its recent settlement with Fannie Mae involving mortgages originated by Countrywide. The bank also had to take a $1.1 billion hit for its portion of a settlement reached last week among regulators and big banks over foreclosure abuses and it reported a further litigation expense of $900 million. Net income was $732 million, down from $2 billion a year earlier.
Both banks are beginning to exhaust the patience of investors. It has been five years since the financial crisis yet Citi and Bank of America Merrill Lynch cannot seem to get back on track. Both have also missed the boost in earnings from mortgage originations that have benefited regional banks and their main competitors, JPMorgan and Wells Fargo. US Bancorp, for example, posted net income of $1.3 billion for the quarter, taking 2012’s profit to $5.6 billon – largely on the back of mortgages.
Bank of America said mortgage originations were flat with a year earlier in the fourth quarter and dropped 50% for 2012 to $75.1 billion. At Citi, fourth-quarter mortgage originations of $16.8 billion were down 20% from a year earlier. In contrast, in 2012 mortgage originations rose 47% to $524 billion at Wells Fargo and 24% to $181 billion at JPMorgan.
Both Wells Fargo and US Bancorp have also managed to counter falling net interest margins (NIMs) with non-interest income. With interest rates so low, banks have no option but to charge fees on current accounts or overdrafts, yet some of the largest banks are struggling to get customers to accept fees. JPMorgan’s NIM was down seven basis points on the quarter and non-interest revenue also fell.
JPMorgan’s results, however, pleased analysts. The bank reported net income of $5.7 billion for the fourth quarter, up sharply from $3.7 billion a year earlier and comfortably exceeding analysts’ estimates. In addition to the mortgage business, earnings received a boost from investment banking and positive loan growth.
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| Jamie Dimon, chief executive of JPMorgan |
The bank also announced that Jamie Dimon, chief executive, would have his 2012 bonus cut in half to $11.5m as punishment for the London Whale trading incident that had JPMorgan racking up more than $6 billion in trading losses. Dimon said on a call to analysts that the loss had “scared” the bank, and that changes to oversight had been made. It is clear that by now analysts are looking for signs that banks have put the financial crisis behind them. Nomura analyst Glenn Schorr said that the fourth quarter for Goldman Sachs was reminiscent of “the old days”.
Indeed it looks as if Goldman Sachs is enjoying a rebound. The bank’s revenue for the final quarter of 2012 was up 50% to $9.2 billion, with profits at $2.89 billion. Net profit for the full year was $7.5 billion, up from $4.4 billion in 2011. In investment banking, net profits were up 63% at $1.4 billion. But it was investment and lending that drove the results. The firm reported $2 billion in net revenue in its investments division, mostly on higher private equity gains and net gains and income on debt securities on tighter credit spreads and higher equity prices in Asia and Europe. Goldman Sachs has also benefited from cost-cutting. That continued in the fourth quarter, with an 11% reduction in the amount set aside for bonuses. Schorr said the results should give investors confidence in the firm’s future earnings power. Its annual return on equity was 10.7%, up from 5.8% in 2011. However, Goldman Sachs CFO Harvey Schwartz said it was “not particularly aspirational” and that the firm “would like to do better”.
