Bank of America on Monday beat analysts' expectations, reporting first-quarter earnings of $2.81 billion after paying preferred dividends, compared with a profit of $1.02 billion a year ago. The news comes on the heels of better-than-expected results from Wells Fargo, Citigroup and other banks.
So what does it all mean for the banking sector? Here, an attempt to read the tea leaves:
With big banks reporting profits again, is the banking sector finally out of the woods?
In a word, no. Most analysts would say they don't see a recovery in the recent results. Some of the banks, including Citigroup and Bank of America, benefited from a huge spike in home refinancing because of low interest rates. JP Morgan and Goldman Sachs benefited from a boost in the bond markets. Citi benefited from some trading gains in interest rates, and an adjustment in how it accounts for its debt.
How much of the profits were one-time gains?
What makes the real health of the banks difficult to assess is that billions of the gains and losses were due to one-time events.
Most of Bank of America's $4.25 billion in net income came largely from its purchase of Merrill Lynch, an acquisition that also more than doubled its revenue. Bank of America took $765 million in restructuring and merger charges during the quarter.
Citigroup's results included many more single-event gains and losses. It closed on a sale of its remaining stake in Redecard, a credit-card service provider, for a gain of $704 million. The company's expenses declined 15 percent due to cuts, including headcount reductions. Also, a 2007 accounting rule change allowed Citigroup to document about $2.4 billion in gain on debt that has lost market value — a change that is meant to reflect the possibility that the company could buy back its own debt at a discount.
Citigroup also wrote down $2.2 billion in its securities and banking operations, as well as $2.3 billion from its subprime home loan business. Its earnings also took a hit after issuing $7.1 billion of preferred stock as part of its deal giving the government a 36 percent stake in the bank.
So are these signs of long-term recovery?
That's the big unknown. With the health of the global economy still in question, and unemployment expected to continue to rise, the mainstay businesses of retail banking and credit cards could be hit by a new wave of defaults — hurting institutions such as Citi, Bank of America and Wells Fargo. Banks are setting aside money to cover anticipated potential losses, but some analysts say the banks might need more than they have set aside to cover future losses.
These banks all received billions in bailout funds from the government. Now that they are reporting a profit, one has to wonder: Did the government give them too much money?
That's debatable. It's not clear whether profitability will continue; it's also not clear whether the bailout money is having its intended effect.
The stated reason for granting the financial industry hundreds of billions of dollars in government loans was to jump-start lending. The Treasury Department said last week that lending, as of February, remained relatively stable — in part because of the money the government injected into the banks.
Treasury said the top 21 bank recipients of taxpayer money originated roughly the same level of loans in February as in January. In its release, the department cited this relative overall stability in lending levels as evidence that the government's Troubled Asset Relief Program has been successful in stabilizing markets and unfreezing the flow of credit.
But a story published in Monday's Wall Street Journal disputes Treasury's figures. The Journal said Treasury calculated the median change in lending among those banks. But when the same raw data are used to calculate the total new loans originated, lending declined 4.7 percent, the Journal said.
Aren't some banks eager to get out from under the cloud of the government bailout?
In fact, Wall Street's strongest banks — Goldman Sachs and JP Morgan — have said they want to repay the government funds. Fresh off of stronger-than expected results last week, JP Morgan Chief Executive James Dimon said, "We could pay it back tomorrow. We have the money."
That followed Goldman Sachs' earlier pronouncement that it would raise $5 billion by selling new shares to the public so that the firm could pay off its loan to the government, thus allowing it to escape federal limits on executive compensation. Wall Street's compensation structure drew fierce fire after the financial sector fell apart. The Obama administration backs proposals to cap salaries at $500,000 for firms receiving federal aid.