Citigroup loss signals more trouble for commercial banks
Wall Street may be drawing attention for its rebounding profits, but not all big banks are rolling in dough.
On Tuesday, Citigroup posted a $7.6-billion loss for the last three months of 2009, the banking giant’s first unprofitable quarter since 2008. Similar bad news is expected today when Bank of America Inc., Wells Fargo & Co. and U.S. Bancorp report their earnings.
Although these commercial banks may have substantial Wall Street operations, they rely heavily on bread-and-butter consumer lending -- a business whose problems only now may be peaking along with the joblessness and other financial woes of ordinary Americans.
The picture is very different at Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley, which mainly serve the financial needs of the world’s largest companies.
These investment banks were hit early in the financial crisis due to their heavy involvement in the market for mortgage-backed securities, which crashed in 2008.
By the end of that year, of the five major Wall Street firms, only Goldman and Morgan Stanley were still standing as independent firms.
And they recovered swiftly in 2009, allowing for the return of fat compensation packages. Morgan Stanley is expected to report strong fourth-quarter results today with Goldman Sachs following Thursday.
“In the case of Goldman and Morgan Stanley, you don’t have to deal with the consumer -- and the outcome is good for them,” said Richard Bove, a bank analyst at brokerage Rochdale Securities. “On the other hand, when you look at one of these big universal banks, they have these huge credit-card and automotive-loan divisions. They are all up to their heads in mud.”
Even JPMorgan Chase Inc., which last week reported a $3.3-billion fourth-quarter profit, had losses in its retail lending and credit-card operations. The profit came largely from its investment banking and private equity divisions.
At Citigroup, most of the fourth-quarter loss stemmed from an accounting charge linked to the company’s exit from the government’s Troubled Asset Relief Program. Even without that charge, Citigroup would have lost $1.4 billion in the period.
The bank’s ugliest results came in consumer banking, where losses widened from the third quarter.
“U.S. consumer credit remains an issue,” Citigroup Chief Executive Vikram Pandit said in a conference call Tuesday.
Although the results were worse than expected, Citigroup’s shares jumped 12 cents, or 3.5%, to $3.54, apparently because the company added less in the latest period than in the third quarter to its accounting provisions for future loan losses.
“Things have gotten worse, but at a much slower rate,” said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.
Among the big banks, few have suffered as much as Citigroup from the mortgage meltdown and resulting crises and market downturns.
For years, the company gobbled up firms from every corner of the financial realm, turning itself into a global financial supermarket.
As a result, it got hit on all sides when the troubles began, especially on its stake in securitized mortgages. Last year, the company sold 14 divisions, including the storied Smith Barney brokerage.
Citigroup’s fourth-quarter loss, amounting to 33 cents a share, was significantly better than its loss of $17.2 billion, or $3.40 a share, a year earlier at the height of the financial crisis.
Still, Citigroup’s stock fell 51% last year and remains down 47% from the end of 2008.
The biggest contributor to the latest loss was Citigroup’s swift push to leave TARP at least in part to escape the government’s oversight on matters such as executive compensation.
In December the company paid back the remainder of the $45 billion it received under TARP, but it also had to pull out of an agreement under which the government would have shared losses on some of Citigroup’s loan portfolio. That helped lead to a $10.1-billion pretax charge against earnings for the quarter.
Citigroup’s decision to pay back the government money was controversial, in part because to do so the company had to sell more common stock, diluting the stakes of its existing shareholders.
Among the earnings reports due today, Bank of America has a massive credit-card operation that is expected to show big losses.
Bank of America also has a large mortgage portfolio that it acquired when it purchased Calabasas home-loan giant Countrywide.
Wells Fargo, based in San Francisco, acquired its own set of troubled loans in 2008 when it bought Wachovia and its California-heavy mortgage portfolio.
“It’s a meaningful chunk of the portfolio, and an even more meaningful chunk of their losses,” said Bart Narter, senior vice president at consulting firm Celent in San Francisco.
Politically, the hottest numbers from Citigroup’s earnings report are likely to be its compensation figures.
The company put aside $6.3 billion in the fourth quarter to compensate its employees, an increase from the previous quarter and enough to give $94,290 to each of its 265,000 employees for the year.
Citigroup did not follow the lead of banking giant JP Morgan Chase, which shrank its compensation pool in the fourth quarter compared with the third quarter amid the public uproar over banker bonuses. At the very top, however, Citigroup’s Pandit has said he will forgo a bonus for 2009.
nathaniel.popper@
latimes.com
