Profit surge boost for Wall Street
Sun Herald
Sunday July 19, 2009
THE US market's financial health is showing continuing signs of improvement as Citigroup and Bank of America announced billions of dollars in profits.However, the two struggling banks relied on large one-off asset sales to bolster their earnings as bad debts mounted on credit cards and mortgages.Both institutions are relying on vast sums in aid from US taxpayers for survival. Their earnings, which exceeded analysts' expectations, came out as influential White House economic adviser Larry Summers declared the US financial system was "back from the abyss".Citigroup, which will soon be one-third owned by the US Government under a complex debt-for-equity swap, announced a $US4.3 billion ($5.3 billion) quarterly profit, compared with a $US2.5 billion loss for the same period last year.Its figures included a $US6.7 billion boost from spinning off its Smith Barney brokerage into a joint venture with Morgan Stanley.Derided by some as a "zombie bank" dependent on support from the US Treasury, Citigroup was once the world's largest bank by assets. It has shed investments and businesses worth $US250 billion during the past two years and has cut 96,000 jobs, reducing its payroll to 279,000 employees.As its customers struggle to pay credit card bills and home loans, Citigroup's credit costs leapt 81 per cent to $US12.4 billion, comprising $US8.5 billion for new loan losses and reserves of $US3.9 billion against future liabilities.Nevertheless Citigroup's chief executive, Vikram Pandit, has spotted signs of hope."Based on everything we see, it seems as though the rate of growth in credit losses is moderating," Mr Pandit said."While the markets are still uncertain, this is increasingly a strong operating story with a restructured business model."Mr Pandit, who took the top job at Citigroup following the removal of Charles Prince in late 2007, is presiding over the division of the company into a "good bank" with profitable operations named Citicorp, and a troublesome "bad bank" with questionable assets called Citi Holdings.Meanwhile, Bank of America, one of the biggest financial institutions in the US, delivered a $US3.2 billion quarterly profit, down from last year's $US3.4 billion. This profit figure came after a one-off gain of $US5.3 billion on the sale of a stake in China Construction Bank.The bank recorded a $US13.4 billion provision to cover credit losses, blamed largely on worsening liabilities on residential mortgages.Both banks followed a trend set by Goldman Sachs and J.P. Morgan earlier last week of a return to prosperity from surging stockmarkets and from less vibrant competition in trading on Wall Street. This good news was offset by a deterioration in general banking services, which is causing increasing concern to experts. "Growth in charge-offs and non-performing assets still scares the daylights out of me," said Paul Miller, an analyst at FBR Capital Markets.Critics have said that Citigroup needed the proceeds from its Smith Barney sale to paper over the cracks in its finances. Michael Williams, an analyst at Gradient Research, said: "The underlying core operations are still doing quite terribly."In spite of these worries, President Barack Obama's allies are talking up the progress in the US economy. In a speech to the non-partisan Peterson Institute in Washington, Mr Summers said: "We were at the brink of catastrophe at the beginning of the year but we have walked some substantial distance back from the abyss."Referring to initiatives such as the White House's economic stimulus package and stress tests which calmed nerves over the health of banks, Mr Summers said "substantial progress" had been made in rescuing the economy from a collapse that looked "all too real six months ago".But the industrial conglomerate General Electric, which has long been viewed as a barometer of the US economy, offered a sobering note with a 47 per cent slump in profits to $US2.9 billion.
© 2009 Sun Herald
