It’s now clear the big profits reported by Goldman Sachs and JPMorgan last week were not indicative of the health of the American banking sector: either in the big city or the regions.
On Friday, Bank of America and Citigroup both turned in poor quality profits that were bolstered by asset sales: without those deals, both majors would have reported more losses, and probably sent the market lower.
Over the weekend, four more American banks went bust and one of the country’s major business financiers, CIT Group, locked in talks to avoid bankruptcy.
The four banks that failed were all of moderate size: two had over $US1 billion in assets each.
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The banks were in Georgia, two in California and the fourth was in South Dakota.
Georgia now has an unenviable record: the 10 failures so far this year top the nation.
Friday’s failures will cost the FDIC fund nearly $US1.1 billion, an expensive Friday, and brings the total cost for failed banks to $US13.4 billion so far this year. That compares with $US17.6 billion in all of 2008’s 25 losses (which did include the huge bust of Washington Mutual and the costly Indy Mac failure in California).
Bloomberg pointed out that one of the banks to fail, the Vineyard Bank in California, had lost more than $US100 million in the last year as builders defaulted on construction loans. The construction and commercial property sector is now emerging as the latest problem area for the country’s struggling banks, especially in regional America.
Friday saw a surge in credit losses reported by Bank of America Corp and a weak report from Citigroup, while General Electric Co’s revenue fell sharply and the performance from its troubled finance division was not encouraging.
Bank of America, (the largest US bank) reported a 25 per cent fall in second quarter profit to $US2.42 billion and it warned results would continue to be hurt by troubled loans from credit card, mortgage and business customers due to the weak economy.
“Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010,” Chief Executive Kenneth Lewis said in a statement with the results.
BofA’s profit came after it booked a profit of $US5.3 billion gain from its sale of a stake in China Construction Bank during the quarter, and another $US3.8 billion on the sale of its share of a merchants payment company to a joint venture backed by an unnamed investor.
Excluding those profits, BofA would have posted a loss for the quarter. And that worried investors and analysts on Friday and helped clip much of the optimism from the reports by Goldman Sachs and JPMorgan.
Citigroup reported a $US4.3 billion quarterly profit, thanks to the merger of its brokerage arm into a new venture after struggling to survive the financial crisis. Without the profit from that sale being booked in the quarter, Citi would have incurred a loss.
Citi, (which is about to give a 34% stake to the US government) earned a profit compared with a loss of $US2.5 billion a year ago.
But its earnings were boosted by a $US6.7 billion gain from the partial sale of Smith Barney, Citi’s brokerage arm, to Morgan Stanley, so without that profit, Citi would have been deep in the red again and seen its sixth loss in the past seven quarters.
US analysts pointed out that the results from both banks (and from the consumer business of JPMorgan earlier in the week), confirmed the very poor financial state of US consumers.
Citi and BofA saw losses in their credit card, mortgages and other retail lending businesses continue to rise in the quarter and neither saw any evidence of a peak approaching.
Citi incurred credit costs of $12.4 billion, including $US3.9 billion set aside to cover future loan losses. BofA had credit costs of $US16.4 billion in the three months to June.
Goldman Sachs on Tuesday said quarterly earnings surged 33% while JPMorgan Chase & Co reported a 36% rise on Thursday: Friday’s results from BofA and Citi trimmed the optimism from the two earlier reports.
And several regional US banks joined BofA and Citi in reporting lackluster second-quarter earnings on Friday.
The reports confirmed that the big profits revealed by the likes of Goldman and JPMorgan were the exceptions, not the rule.
The North Carolina bank, BB&T Corp and Webster Financial Corp of Conneticut did better than analyst estimates; First Horizon National Corp, based in Memphis and Tennessee’s biggest bank and Marshall & Ilsley Corp, Wisconsin’s biggest bank did not. Only BB&T, which says its America’s 10th largest bank, turned a profit and that was slashed by losses from bad loans.
BB&T reported net income of $US121 million, down from $US428 million. It set aside $US701 million for credit losses.
Webster lost $US28.7 million from $US31.6 million a year earlier; First Horizon had its fifth straight quarterly loss, losing $1US32.2 million, compared with a $US19.1 million loss a year ago. Marshall & Ilsley cut its quarterly loss to $US139.3 million from $US383.8 million.
Meanwhile, at General Electric, profits fell by nearly half as revenues dropped 17 per cent, worse than forecast by analysts and driven from the widespread impact of the credit crunch and the recession on all of its businesses.
While earnings topped forecasts, overall revenue at the company fell to $US39.1 billion from $US46.8 billion a year earlier.
The drops in revenue and earnings were widespread across GE, with its capital finance unit reporting the largest decline — a 29% drop in revenue and an 80% plunge in earnings. NBC Universal saw earnings fall 41 per cent at its TV and film business: results from other parts of the industrial portfolio were weaker as well.
There was a glimmer of good news for GE’s finance businesses despite the problems at CIT Group, which operates in the same areas.
But it now seems CIT has done a deal with major bondholders for $US3-billion in financing that will allow the 101-year-old lender to avoid bankruptcy protection, to the Wall Street Journal website.
CIT has $US75 billion of assets and much of those will have to be refinanced or closed off if the company fails. It has been in talks with unnamed companies about new financing, or debtor in possession finance in the event it goes into bankruptcy.
Market sources claimed these unknown companies were JPMorgan Chase & Co and Goldman Sachs, but neither firm confirmed the discussions.
Friday night saw the first company collapse as a result of CIT’s problems: an Alabama hardware firm went into Chapter 11.
Bloomberg said Moore-Handley Inc, which supplies tools and other items to hardware stores and home centers, was forced into Chapter 11 because it had trouble getting cash from CIT, its lender.
“The company has tried to negotiate with CIT, though “the federal government’s recent decision not to support CIT’s reorganisation has thrown CIT into disarray and casts substantial doubt on CIT’s ability to continue to fund the Debtor’s working capital requirements,” Moore-Handley said in documents filed in US Bankruptcy Court in Birmingham, Alabama.