Big Banks Are Back as JPMorgan, Citigroup Turn Corner on Crisis
Main Street teamed up with Wall Street to produce something the four biggest U.S. lenders haven’t had since the banking crisis began two years ago: reason for optimism.
Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co., beneficiaries of $140 billion in taxpayer funds, reduced loan-loss provision expenses from last quarter and said the bottom of the credit cycle was past. Their investment-banking arms capitalized on fixed-income trading, leading to combined first-quarter profits of $13.4 billion, the most since the second quarter of 2007 before the crisis began. Citigroup reduced reserves for the first time since 2006.
“This quarter is confirmation that credit has turned a corner,” said Charles Peabody, an analyst at New York-based Portales Partners LLC who assigns “buy” ratings to Bank of America and JPMorgan, and a “hold” to Citigroup. Peabody doesn’t cover Wells Fargo. “You’ve heard every CEO say credit has turned, and there is nothing to be gained for them by being overly optimistic.”
Brian T. Moynihan, Bank of America’s chief executive officer, said April 16 that “the worst of the credit cycle is clearly behind us” and that economic growth is “real.” JPMorgan CEO Jamie Dimon said the economy may be poised for a “strong recovery.”
It was only 11 months ago that the Federal Reserve concluded that 19 U.S. banks might have to raise $600 billion under “more adverse” economic conditions. Standard & Poor’s forecast at the time that the banking crisis could last until 2013. The four biggest banks have since repaid most or all of the U.S. bailout funds.
While smaller U.S. lenders keep failing, pushing the Federal Deposit Insurance Corp.’s list of “problem” banks to a 17-year high, the largest are getting a lift from economic growth that’s helping consumers and businesses stay current on loan payments.
The economy grew across most of the U.S. in March as consumer spending and manufacturing orders rose, the Fed said on April 14. The U.S. expanded at a 5.6 percent annual rate in the final quarter of 2009, the fastest economic growth in six years.
At least 11 stock-market analysts increased their target prices for New York-based JPMorgan and Bank of America in Charlotte, North Carolina, after the banks reported quarterly earnings this month. Eight boosted their targets for Citigroup, whose CEO, Vikram Pandit, said on April 20 that he felt “a whole lot better” than he did a year ago and maintained that the bank is “positioned for growth.”
Analysts have focused on the trend in provisions for loan losses as a clearer indicator of future bank profits than quarterly earnings. Reducing the provision signals confidence that credit charges will lessen.
Bank of America reported provisions of $9.8 billion, down $305 million from the fourth quarter, as most consumer and commercial loan losses declined. JPMorgan reduced provisions by $274 million overall and cut reserves in its card-services unit by $1 billion, according to the April 14 statement. Wells Fargo, based in San Francisco, trimmed provisions by $583 million, and Citigroup cut them as well, if an accounting rule change is applied retroactively.
“Stabilization in jobless claims and stabilization in unemployment are reducing the need to build reserves,” Morgan Stanley bank analyst Betsy Graseck said in an interview. Banks are “at the beginning of what will be a strong cyclical recovery in bank earnings.”
The number of Americans filing claims for unemployment benefits fell to 456,000 in the week ended April 17, the Labor Department said, down from the peak of 651,000 in March 2009. U.S. employers added the most jobs in three years last month.
Results on Wall Street were lifted by investment banking revenue, which gained on fixed-income trading as near-zero interest rates enabled banks to access cheap financing for trading positions. Bond underwriting increased from the fourth quarter as U.S. companies tapped debt markets to lock in low borrowing costs.
Bank of America’s sales and trading revenue rose 12 percent to a record $7 billion in the first quarter, buoyed by the 2009 purchase of Merrill Lynch & Co. JPMorgan’s trading revenue increased 3.9 percent to $6.9 billion from the year earlier.
Citigroup, based in New York, increased revenue in its fixed-income markets unit over the previous three months on its way to a profit of $4.4 billion, the most among the four banks and the highest since the second quarter of 2007. The bank marked up the value of subprime-mortgage backed bonds it holds by $800 million, a reversal from writedowns that caused much of Citigroup’s losses over the past two years.
Of the four banks, Citigroup is the best-performing stock this year, up 46.8 percent. Wells Fargo has gained 24 percent, Bank of America 22.4 percent and JPMorgan 7.9 percent. Three of the four banks have outperformed the Standard & Poor’s 500 Index, up 9.2 percent since the beginning of 2010.
Eric Hovde, a money manager overseeing $700 million at Hovde Capital Advisors LLC in Washington, said investment- banking revenue hides weaknesses in the banks’ core lending operations. Wells Fargo, which had a first-quarter profit of $2.55 billion, said its lack of a comparable capital-markets business led it to a more measured view of the economic rebound.
“Much more of our business is Main Street rather than Wall Street,” Wells Fargo Chief Financial Officer Howard Atkins said in an interview. “What we’re seeing on Main Street is a clear but gradual recovery.”
Reason for Caution
Even as the economy improves, there’s reason for caution, said Paul Miller, a former bank examiner for the Federal Reserve Bank of Philadelphia who’s now an analyst at FBR Capital Markets Corp. in Arlington, Virginia. Bad loan balances are still elevated, houses across the country remain vacant and home-sale incentives are ending, Miller said. Banks may also face pressure from regulators investigating the mortgage crisis.
The U.S. Securities and Exchange Commission sued Goldman Sachs Group Inc. on April 16 over collateralized debt obligations and said they were looking at other banks involved in the market. Bank of America and its Merrill Lynch unit, which underwrote $16.85 billion of similar synthetic CDOs, led Credit Suisse AG’s “CDO litigation risk” list. Moynihan said he had “no knowledge” of any issues.
‘Crisis Is Over’
“There is that mindset that the financial crisis is over,” Miller said. “I think it’s still too early.”
JPMorgan’s Dimon offered similar caveat when he said in the bank’s earnings statement on April 14 that the economy “still faces challenges.”
Wells Fargo CEO John Stumpf has said one of his biggest worries is waning loan demand from both businesses and consumers, even as the bank said credit conditions have hit a bottom.
“The crisis is over, but I’m not sure demand is back,” said Nancy Bush, a bank analyst at NAB Research LLC in Annandale, New Jersey.
While Bank of America and other big lenders said they’re confident enough about credit trends to start releasing reserves for future loan losses, U.S. Bancorp, the largest bank in Minnesota, said it won’t do that.
“A year ago we were in the middle of a financial panic, but these banks are looking forward,” said Gary Townsend, president of Hill-Townsend Capital, a Chevy Chase, Maryland- based investment firm with $50 million of holdings in financial companies. “The improvement is becoming quite pronounced.”
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