By Christina Rexrode And Saabira Chaudhuri
More than five years into the economic recovery, the nation's
biggest banks are still on the outside looking in, as their
fortunes grow increasingly disconnected from the rest of the
country's.
Once looked to as a proxy for the financial health of American
consumers and businesses, banking giants are struggling to boost
profits despite safer balance sheets, a boom in global deal making
and pockets of loan growth.
Bank of America Corp. and Citigroup Inc. on Thursday posted
disappointing results. While bank profits have bounced back from
the dark days of the financial crisis in late 2008 and 2009, the
latest year can be best viewed as an interruption in the
recovery.
Bank of America reported that annual net income dropped 58% for
2014 and Citigroup reported its own 47% fall, largely due to
regulatory fines and sluggish revenue in both cases. Including
annual profit growth at J.P. Morgan Chase & Co. and Wells Fargo
& Co., overall net income for the four banks fell 12%.
Investors sold off bank shares. The KBW Bank Index is down 7.5%
over the past five trading days, the worst five-day stretch on a
percentage basis since November 2011.
Like other big financial firms, Bank of America and Citigroup
suffered to varying degrees from slumps in trading and the
continued effects of low interest rates.
With the latest earnings reports Thursday morning, three of the
four largest U.S. banks have now reported falling profits and
revenue that missed analysts' estimates.
Only Wells Fargo, which doesn't have a big trading business and
features a bigger exposure to consumers than most of its peers, had
rising profit and beat revenue estimates for the fourth
quarter.
The banks "just can't seem to get out of their own way," said
Walter Todd, chief investment officer of Greenwood Capital in
Greenwood, S.C., which owns about 320,000 shares of Bank of
America. "You keep thinking, 'This is going to be the quarter, this
is going to be the quarter,' and something always comes up."
Goldman Sachs Group Inc. reports earnings Friday morning, and
Morgan Stanley reports Tuesday.
In recent days, the financial sector has seen positive signs
about the outlook for 2015, including a spike in mortgage
applications that was announced Wednesday. Many investors also
believe last year reflects a low point for the banking industry, as
it clears out most of the legal expenses tied to crisis-era
conduct, and as it faces the likelihood of rising interest rates in
the near future.
Brian Moynihan, Bank of America's chief executive and chairman,
said Thursday the firm has "built a platform for growth, especially
in the context of a continuous improving U.S. economy."
The thus-far lackluster fourth-quarter results for the financial
sector come even after sustained hiring and falling unemployment
helped the U.S. economy post its strongest growth in 11 years in
the third quarter. Most economists expect reports to show positive
growth for the broader economy in the fourth quarter, as well,
possibly boosted by increased consumer spending due to the drop in
oil prices.
Many parts of big banks still move in lock step with the health
of the general economy. Lending growth helps banks and generally
tends to perk up when the jobless rate falls and the economy picks
up steam. Deal-making activity, which yields big fees for
investment bankers, also heats up when corporate executives feel
more confident about the economy and markets.
But in recent years, Federal Reserve policy and a tough
postcrisis regulatory environment have somewhat decoupled banks
from the health of the U.S. SHYeconomy.
Low interest rates have kept a lid on banks' profitability in
their lending businesses. The measurement of the difference between
what a bank makes on lending and investing and what it pays
depositors fell to 3.04% at Wells Fargo during the fourth quarter,
from 3.27% a year earlier.
So even with activity brisk at some banks in places like
automotive lending and credit cards, and among some commercial and
industrial borrowers, Fed policy and the low rates in the bond
market make those loans, on average, less profitable for banks.
Big fines and regulatory penalties have also had an impact on
earnings and kept banks from getting in sync with the recovery.
Bank of America, for instance, was hammered by a record $16.65
billion fine it agreed to pay in August over past mortgage-related
violations.
Trading businesses--which Bank of America and J.P. Morgan both
bulked up on via acquisitions during the financial crisis--have
muddled through a rough year. Bank of America, Citigroup and J.P.
Morgan all reported declines in trading.
Shares of Bank of America fell 84 cents, or 5.2%, to $15.20, and
Citigroup fell $1.82, or 3.7%, to $47.23.
For the quarter, Charlotte, N.C.-based Bank of America reported
a profit of $3.05 billion, or 25 cents a share, down from $3.44
billion, or 29 cents a share, a year earlier.
Citigroup reported a quarterly profit of $350 million, down from
$2.46 billion a year ago, largely because the bank set aside $3.5
billion for legal fees and cost cutting. On a per-share basis,
Citigroup reported a profit of six cents. Analysts had expected
earnings of nine cents a share, including the charges.
The disappointing earnings came despite the fact that, for both
Citigroup and Bank of America, it was a rare quarter when they
announced earnings without an accompanying legal settlement or some
other bad-news development. To some investors, that signaled that
the banks, which could once be counted on for highflying returns,
were turning into something more humdrum.
"The banks are more like utilities," said Brian Boyle, president
of Boyle Capital in West Des Moines, Iowa, a firm that owns more
than two million Bank of America shares. "You're going to get a
return from dividends and buybacks" rather than revenue growth in
the near future, he said.
The banks this year again looked for greater profits by trimming
expenses. Bank of America cut another 300 branches over the year,
or about 6% of its locations, and another 18,400 employees, or
about 8% of its staff. Citigroup also cut about 12% of its branches
and 4% of its employees. And it got rid of some small units in its
investment bank, including one that offers administrative support
for hedge funds and another that handles prepaid cards for
corporate clients.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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