Citibank, BofA Results May Not Point To Recovery
Bank of America and Citibank posted bigger-than-expected profits for the second quarter, raising hopes the financial crisis has eased. But the strong-looking results released Friday include gains from accounting changes and other factors, and don't necessarily show a big improvement in the banks' underlying financial health.
ROBERT SIEGEL, host:
From NPR News this is ALL THINGS CONSIDERED. I'm Robert Siegel in Washington.
MADELEINE BRAND host:
And I'm Madeleine Brand in California.
The fortunes of some of the country's biggest banks are starting to look up. Today, Bank of America posted a bigger than expected profit for the second quarter; so did Citigroup. Earlier this week there were positive numbers from J.P. Morgan and Goldman Sachs. But as NPR's Tom Gjelten reports, the strong results might not be as promising as they appear.
TOM GJELTEN: Banks don't make it easy for us to figure out exactly how they're doing. Whether they report big earnings and profits or losses depends in part on how things get counted. Strict accounting standards in place last year meant many banks were forced to report huge losses. This year the standards are looser. So what was previously a loss may not look so bad this year. Michael Williams is director of research at Gradient Analytics.
Dr. MICHAEL WILLIAMS (Director of Research, Gradient Analytics): They have real gains and real losses at various points of time. But you don't necessarily recognize them until different points in time. And so what you're seeing reported in any given period may not really be reflecting what happened in that particular period.
GJELTEN: J.P. Morgan and Bank of America last year had to set aside billions of dollars to cover possible losses that counted as an expense on their balance sheets. In this latest quarter, their set-asides either held steady or declined so things look better. But that doesn't necessarily indicate the health of their overall business operations. Here's another example: Citigroup just reported a big quarterly profit but it was mostly due to a one-time $6.7 billion gain from merging its Smith Barney Brokerage into a joint venture with Morgan Stanley. Because of such factors, banking analyst Bert Ely says he skips the headlines when he looks at bank earnings reports and goes for the details.
Mr. BERT ELY (Independent Banking Analyst): I don't spend much time looking at what the bottom line number is, but instead focus on the components of the bank's earnings and losses.
GJELTEN: For example, when Bank of America's chief financial officer Joe Price discussed his bank's performance this morning on a conference call with analysts, he slipped in this little detail.
Mr. JOE PRICE (Chief Financial Officer, Bank of America): As you can see on slide 21, managed consumer credit card net losses were five billion, compared to 3.8 billion in the first quarter.
GJELTEN: So the Bank of America losses on credit cards increased by more than a billion dollars. With unemployment rising, more people are going to default on their credit cards. Bank of America and other institutions are also reporting growing problems in commercial real estate. On the other hand, the bank profit reports this week do show they are building up their capital base. That will permit them to increase their lending, which is what is needed to stimulate economic recovery. But recovery will be slow. Lawrence Summers, President Obama's chief economics advisor, said today in a speech in Washington that one of the problems in the U.S. economy was that there was too much borrowing, too much debt. But borrowing fuels economic activity, so if less debt is taken on, economic activity will slow down.
Mr. LAWRENCE SUMMERS (Chief Economics Advisor, White House): The common desire of households, businesses and financial institutions, to reduce their borrowing and improve their balance sheets, will act as a drag on spending and growth. While painful, these adjustments are essential to laying a sound foundation for future growth.
GJELTEN: In that speech, Summers argued that the improved banking picture is in part the consequence of the federal government's intervention in the financial system, but whether all the big banks really needed that help is debatable. Some analysts say J.P. Morgan and Goldman Sachs, the gold star performers this week, could have come through the financial crisis without government help.
Tom Gjelten, NPR News, Washington.
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