June 24, 2024

DealBook: Citigroup Earnings Plummeted in Third Quarter on Write-Down

A Citibank branch in New York.Brendan McDermid/ReutersA Citibank branch in New York.

9:42 a.m. | Updated

Citigroup said on Monday that its third-quarter earnings plummeted because of a $4.7 billion loss related to the joint venture brokerage business Morgan Stanley Smith Barney.

Last month, Citigroup agreed to sell its part of the joint venture, beginning with a 14 percent stake, to Morgan Stanley. Citigroup said at the time that it was writing down the value of its remaining interest in the brokerage business.

The loss was offset slightly by an uptick in mortgage lending and buoyed by a rebound in capital markets. Citigroup, the nation’s third-largest bank, reported net income of $468 million, or 15 cents a share, on revenue of $14 billion, compared with net income of $3.8 billion, or $1.23 a share, in the quarter a year earlier.

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Excluding the loss on its brokerage unit, a one-time accounting charge and credit adjustments, the bank reported earning $3.27 billion, or $1.06 a share, up from $2.57 billion, or 84 cents a share, in the period a year earlier.

Citigroup was expected to record earnings per share of 96 cents on revenue of $18.7 billion.

Like its rivals in the industry, Citigroup is grappling with sluggish growth in the United States.

Under the leadership of Vikram S. Pandit, its chief executive, the bank has worked to sharply reduce the bank’s expenses and credit losses. “Our core businesses showed momentum during the quarter as we increased lending and generated higher operating revenues,” Mr. Pandit said in a statement.


Along with Bank of America, Citigroup was among the banks most crippled by the financial crisis of 2008. Mr. Pandit has vowed to restore the bank to profitability, in part by shedding more troubled assets.

Citigroup is still trying to work through the glut of bad assets it holds in its Citi Holdings Unit.

Increasingly, a large share of the company’s earnings stem from its consumer banking unit in North America, which includes mortgage lending.

John C. Gerspach, the bank’s chief financial officer, emphasized in a conference call on Monday that Citigroup was able to successfully grow across its “core businesses.”

While Citigroup did not get the same help from mortgages as rivals like JPMorgan Chase and Wells Fargo, which reported robust profits on Friday from a refinancing frenzy, the bank reported an 18 percent increase in profit in its North American banking segment, in part because of mortgage lending. Even though mortgage originations were down, revenue in the unit was up, in part as a result of widening spreads on the loans. Mr. Gerspach suggested the bank could have been more nimble by increasing staffing to handle the burst in refinancing activity.

On Friday, JPMorgan’s chief executive, Jamie Dimon, pointed to robust growth in its mortgage banking unit, sounding an optimistic note on the housing market.

“We believe the housing market has turned the corner,” Mr. Dimon said.

Mr. Gerspach, however, struck a more cautious tone. “There is still a question, clearly in my mind, as to whether we have a strong enough economy to support the housing market,” he said.

The bright spot for Citigroup on Monday was a 67 percent increase in profit from its securities and banking unit, as the bank benefited from revived capital market activity.

“We continue to gain market share in investment banking,” Mr. Gerspach said. He pointed to “improved market share in every investment product.”

Outside of the United States, however, some of Citigroup’s results were lackluster. Profit in its international consumer banking unit fell 3 percent, to $862 million, from $885 million in the period a year earlier. With a large international footprint, the bank has positioned itself to benefit from increased lending in Asia and Mexico.

“There is an underlying growth story in the numbers,” Mr. Gerspach said.

Latin America, where Citigroup has positioned much of its hopes for increased profitability, saw some gains. Revenue in the region grew 7 percent, to $2.4 billion. Some of the profit was crimped by reduced loan spreads in Asia.

Across the bank, consumer banking posted revenue gains of 2 percent, to $10.2 billion, from the period a year earlier, while net income in the consumer banking unit increased 18 percent, to $2.2 billion.

Shares of Citigroup were up nearly 3 percent in early trading in New York on Monday.

Article source: http://dealbook.nytimes.com/2012/10/15/citigroup-earnings-plummet-in-third-quarter/?partner=rss&emc=rss

DealBook: Mortgage Lending Helps JPMorgan Profit Rise 34%

Jamie Dimon, the chief of JPMorgan Chase.Yuri Gripas/ReutersJamie Dimon, the chief of JPMorgan Chase.

Finally moving beyond a trading debacle that has stained his once-stellar reputation, Jamie Dimon, JPMorgan Chase’s chief executive, on Friday trumpeted a strong quarter of earnings stemming from a surge in mortgage lending.

Mr. Dimon has been fighting to shift attention from a multibillion-dollar trading loss in May that rattled investors, prompted the bank to claw back millions in compensation and attracted the scrutiny of federal law enforcement agents. The latest quarter’s profit, up 34 percent, to $5.71 billion, helped do that.

Mr. Dimon, who months ago took a swaggering tone in dismissing the troubled bets and was later forced to be more contrite, struck his usual confident tone on Friday. He emphasized that JPMorgan had contained the fallout from the bungled trade, after closing out the position and limiting the losses to the investment bank of on the remainder of the credit derivative trade. The losses on the bet were $449 million in the third quarter, bringing the total loss to $6.25 billion for the year.

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“Synthetic credit is a sideshow,” Mr. Dimon said.

Instead, he pointed to the bank’s robust growth across its business units, especially in its mortgage banking unit, which reported a profit increase of 57 percent from a year earlier.

“We believe the housing market has turned the corner,” Mr. Dimon said.

Over all, the company’s earnings, at $1.40 a share, surpassed Wall Street’s estimates. Revenue in the third quarter was $25.9 billion, up 6 percent from the year-ago quarter.

As the nation’s largest bank in assets, JPMorgan’s performance, especially when rosy, is seized upon as a positive sign for the overall economy. The growth at JPMorgan, particularly in loans to consumers and businesses, could signal broader optimism among Americans and bode well for the housing markets, which have been lurching toward recovery.

“It’s a distinctly positive sign,” said Glenn Schorr, an analyst with Nomura Securities.

The bank also reported that fewer consumers were behind on their credit card bills. Write-offs of soured card loans fell to 3.6 percent, from 4.7 percent the previous year. Those trends echo a pattern across the United States.

In August, delinquencies on credit cards stood at 2.32 percent, according to Moody’s Investors Service. That’s down from 3.04 a year earlier.

Still, investors in bank stocks remained wary after the earnings announcements of JPMorgan and Wells Fargo on Friday. Shares of JPMorgan declined 48 cents, or 1.14 percent, to $41.62. Investors were spooked, in part, by shrinking net interest margins, which is the profit margin achieved from lending and investing. JPMorgan’s net interest margin, for example, dipped to 2.43 percent from 2.66 a year earlier.

At JPMorgan, a glut of deposits is challenging because of persistently low interest rates, which make yields on the bank’s investments anemic.

JPMorgan’s earnings were buoyed, though, by an increase in mortgage lending, spurred, in part, by exceedingly low interest rates, driven even lower in recent weeks by the Federal Reserve’s mortgage bond buying program. New home loans and refinancings at the bank hit $47 billion, up 29 percent from the period a year earlier.

Mr. Dimon tempered his expectations for the market and noted that a large swath of the new originations came from a burst of refinancing activity that would eventually slow down. Refinancings accounted for roughly 75 percent of the quarter’s mortgage volume.

He warned, too, that defaults could continue, along with foreclosures, which would most likely leave the bank to shoulder higher costs.

Hitting a familiar tone, Mr. Dimon also remarked that the housing market could rebound more quickly if lawmakers in Washington did less meddling. “I would hope for America’s sake we start to fix the things that make the mortgage underwriting too tight,” he said on a conference call with reporters.

Throughout its core lending businesses, JPMorgan showed signs of strength. The commercial banking group reported record revenue. The volume of credit card sales jumped 11 percent over the previous year, bolstering the broader unit. The card services and auto business posted profits of $954 million, up 12 percent.

With the improving credit environment, JPMorgan set aside less money to cover potential losses, increasing its profits. In the mortgage banking business, the bank cut the amount of reserves by $900 million. Across the bank, JPMorgan set aside $1.79 billion of such funds, compared with $2.41 billion a year earlier.

Revenue from fixed-income and equity markets remained largely stagnant.

Still, the bank is dogged by investigations that could increase its headaches going forward. In the latest challenge for the bank, federal authorities are building criminal cases related to the trading loss, examining calls in which JPMorgan employees talked about how to value the bets. The Securities and Exchange Commission is also investigating the trading losses.

In addition, JPMorgan is facing a lawsuit against Bear Stearns, the troubled unit it now owns. Earlier this month in its first move against a big bank, the federal mortgage task force, co-headed by the New York attorney general, Eric T. Schneiderman, sued Bear Stearns and its lending unit, claiming it defrauded investors who bought mortgage securities during the housing boom.

In a bid to clean up the bungled trade ahead of its third-quarter earnings, JPMorgan has broadly reshuffled its top executive ranks. For example, Douglas L. Braunstein, the bank’s chief financial officer since 2010, is expected to give up his position, but remain at the company. Earlier, Barry Zubrow, who currently heads the bank’s regulatory affairs, announced he would resign by the end of the year.

In the second quarter, the bank transferred the remaining credit bets in the chief investment office to its investment banking unit. On Friday, JPMorgan said it “effectively closed” out its derivative position, which was made by Bruno Iksil, the so-called London Whale.

Article source: http://dealbook.nytimes.com/2012/10/12/jpmorgan-quarterly-profit-rises-34/?partner=rss&emc=rss

DealBook: Banks See Home Loans as Gateway to Big Gains

A Wells Fargo branch in Washington.Gary Cameron/ReutersA Wells Fargo branch in Washington.

8:35 p.m. | Updated

Federal stimulus has ignited a boom in mortgage refinancing, benefiting both homeowners and banks. And the good times could continue as the government steps up its support of the broad housing market.

The proof will be in the profits.

On Friday, Wells Fargo and JPMorgan Chase, the top two mortgage lenders in the country, are scheduled to report quarterly earnings. Their results — and the other bank reports that follow — will offer clues as to whether the current mortgage boom is sustainable or set to fizzle.

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“We expect mortgage revenue to continue to be elevated in the third quarter and possibly into next year,” said Jason Goldberg, a banking analyst at Barclays.

In the third quarter, banks probably originated as much as $450 billion of home loans, according to estimates by Inside Mortgage Finance, a publication that tracks the industry. That figure, which includes both refinances of existing mortgages and new loans to buy a house, would be a considerable jump from the previous period. In the second quarter, banks originated $405 billion, with 68 percent in refinancings.

A branch of JPMorgan Chase in Manhattan.Justin Sullivan/Getty ImagesA branch of JPMorgan Chase in Manhattan.

Since the financial crisis of 2008, some large banks have found themselves well positioned to make money when the mortgage market gets hot. The profits from making mortgages have helped banks at a time when lower interest rates have weighed on other sources of revenue.

The banks benefit because they act as middlemen in the mortgage machine. Instead of holding on to new mortgages that earn interest over a number of years, banks sell nearly all of them to investors after packaging them into bonds. The federal government, through entities like Fannie Mae, attaches a guarantee of repayment on the loans, making the bonds even more attractive to the investors.

When the banks sell the mortgages as bonds, they do so at a profit. This markup has become even bigger after the recent moves by the Federal Reserve and the Treasury Department to help the housing sector.

In September, the Fed announced plans to buy large amounts of mortgage-backed bonds. The proposal has driven the price of such securities higher, letting banks earn an even bigger financial gain when they sell mortgages into the market.

A Treasury program makes it easier for homeowners who are underwater, meaning their properties are worth less than their loans, to refinance. This initiative, coupled with the ultralow interest rates, has generated a flurry of refinancing activity, producing a windfall for banks.

Some analysts expect banks to keep churning out profits on mortgages. They think it unlikely refinancing will let up anytime soon, given that rates are expected to stay low for a while. The average rate on a 30-year fixed rate mortgage has dropped to 3.36 percent, from 3.95 percent at the end of 2011, according to Freddie Mac figures.

“I estimate that close to half of mortgages have an economic incentive to refinance,” said Paul Miller, a banking analyst at FBR Capital Markets.

Mr. Miller said he believed that with the current industry dynamics, the steady stream of refinancings would last for multiple quarters. Some banks are reluctant to expand their mortgage operations, meaning the market can handle only a limited volume of loans at a time.

These banks fear that entities like Fannie Mae, which guarantee the loans, have become a lot more demanding when asking banks to take back troubled loans. The so-called put-backs can quickly prompt losses that can surpass the income banks originally made on the loans. And although the quality of loans written since the crisis has been high, banks fear they could be swamped with put-backs if the economy slows.

“There’s a lot of uncertainty at the moment, and it does weigh,” said Mr. Goldberg of Barclays.

If banks remain nervous about increasing the amount of mortgages they originate, it only tightens the grip of the few dominant lenders, making it easier for them to determine the interest rates that ordinary borrowers pay and generate strong profits. Mortgage rates could be well under 3 percent, if the gains banks make when they sell the mortgages were at historical levels, according to an analysis by The New York Times this year.

Some of the top banks benefited from the wave of consolidation that occurred during the financial crisis. In the first half of 2012, for instance, Wells Fargo, which acquired Wachovia, and JPMorgan Chase, which consumed Washington Mutual, accounted for 44 percent of all mortgages, according to figures from Inside Mortgage Finance.

In the first half of 2012, Wells Fargo reported gains of $4.83 billion when originating mortgages, a 155 percent increase from $1.89 billion in the first half of 2011. JPMorgan’s mortgage production revenue was up 70 percent.

Still, some analysts are less certain about the strength of the refinancing boom. If Mitt Romney wins the presidential election, he could move quickly to overhaul housing finance in ways that could, at least temporarily, unsettle the mortgage market.

There are more immediate concerns, though.

“The biggest threat is a rise in interest rates,” said Guy Cecala, publisher of Inside Mortgage Finance. For many borrowers, refinancing would no longer make sense if mortgage rates went back up to, say, 3.75 percent.

Even if mortgage rates stay low, the big banks might finally start to see more competition. The temptation of bigger mortgage gains may come to outweigh the fears that some banks have.

“If this lasts longer than expected, you will see banks re-enter the game,” said Todd Hagerman, banking analyst at Sterne Agee Leach.


Article source: http://dealbook.nytimes.com/2012/10/11/boom-in-mortgages-is-expected-to-benefit-banks-profits/?partner=rss&emc=rss