Citibank has survived but I don’t think the bank has much of a future
“We have turned the corner,” Citigroup CFO John Gerspach, said when he announced Citigroup’s first quarter 2010 financial results on April 19.
But I have to ask, What corner is he looking at?
Can’t be the corner of 40th and Broadway near my office in Manhattan. There a dingy Citigroup branch with beat up ATM machines is barely hanging on in competition with a refurbished JPMorgan Chase (JPM) branch down the block (with ATMs that deposit checks without a deposit slip) and a brand new Capital One (COF) office up the block.
Can’t be the corner of 104th and Broadway near my house where a new Sovereign bank branch is siphoning off accounts from local small businesses that used to be Citigroup customers.
Can’t be the corner of my desk where I’ve got my JPMorgan Chase mortgage bill stacked near my Fidelity credit card bills. I get regular annoying phone calls from Chase asking me if I want to refinance my mortgage. I can’t remember ever getting a mortgage marketing call or letter from Citigroup. And my wife and I once had a Citigroup mortgage and we have an account with the bank.
And this is what’s happening in the bank’s home market and what was once its core business of consumer and commercial banking. If Citigroup has trouble on this turf, you know it’s in trouble everywhere.
The truth is that Citigroup has indeed survived. But that, as hard and desperate as that struggle was, may have been the easy part. (This doesn’t mean Citigroup is out of the woods entirely. It could still get caught up in the kind of legal action the SEC (Securities & Exchange Commission) has filed against Goldman Sachs (GS). For more on what banks might be most at risk see my post http://jubakpicks.com/2010/04/20/an-intelligent-guess-at-whos-at-risk-after-the-sec-charges-goldman-sachs/ )
What’s hard to see is a future in which Citigroup is anything more than an also ran.
Saving the big banks but destroying banking
There have been no obituaries. No eulogies. No burial services.
But this quarter marks the death of traditional bank at the big money center banks.
Oh, I know we’ve seen amazing earnings reports from the likes of Goldman Sachs (GS) and JPMorgan Chase (JPM) this quarter. But their profits came from things like trading.
From everything in fact but what you and I—and certainly the preceding generation—called banking.
And it’s exactly those huge profits from everything but banking that have put the final nail in the big banks as bank.
Goldman Sachs and JPMorgan Chase and maybe Bank of America and Citigroup too will survive as financial institutions. But they won’t be banks.
That’s important because hate them though we may at the moment, banks play an important part in making our economy go. And the withdrawal of the nation’s biggest banks from traditional banking leaves a gaping hole in our economy. Perhaps other banks—smaller national banks and regional banks—can fill that hole. But it’s not certain. (I’ll be taking a look at the regional banks next week.) The absence of the big banks from traditional banking won’t bring the economy crashing down, but it will make the economy less efficient at a time when we need as much economic efficiency as we can get.
The model for what these big financial institutions will be is laid out in the most recently quarterly earnings reports from Goldman Sachs and JPMorgan Chase.
Washington isn’t ready to let Bank of America and Citigroup out of the woodshed just yet
Shares of Bank of America (BAC) are under pressure today—down about 5.5% as I write this at 1 p.m.—on a Wall Street Journal report that the bank may have to raise billions more in capital before it can pay back taxpayer bailout funds.
Here’s the problem. Before the bank can replay the $45 billion it borrowed from taxpayers at the height of the financial crisis, federal regulators have to agree that the bank will be adequately capitalized after it repays the money. There’s no point, the government has decided. (and this makes perfect sense to me) if a bank, just to get regulators off its back (and so it can up what it pays to its executives) repays the bailout funds and then finds itself so weak that it has to come back to the government for another rescue during the next financial market hiccup.
In the case of Bank of America, the company borrowed $45 billion in taxpayer money and has raised $40 billion in capital since then. That’s enough, the bank is arguing. Wait a minute, government regulators have said, your credit losses continue to grow and you can’t predict, convincingly, when that bleeding will stop. We think you should raise more capital.
Citigroup puts lipstick on a pig in third quarter earnings report
Ah, bank accounting. I can’t think of any industry where the rules give a company more absolutely legal leeway to turn a terrible quarter into a good one.
Exhibit 1: Citigroup’s (C) October 15 third quarter earnings report.
The company reported a $101 million profit, absolutely astounding every analyst on Wall Street.
For all of 15 minutes anyway. The stock is down 6.6% for the day as I write this at 2:30.
Why didn’t anybody buy the turn-around story? After all this was a bank that posted a $2.82 billion loss in the second quarter of 2008.
Credit card defaults move up again in August
Credit card portfolios at the country’s major banks showed a rising tide of defaults in August. That pretty much wiped out the hope the July’s numbers, which showed a glimmer of improvement marked any bottom in bad loans for the sector.
Consumers. whose spending accounts for about 2/3 of U.S. economic activity, are clearly still in deep trouble.
Among the big three of credit cards, Bank of America (BAC) reported the highest level of write-offs at 14.54%. That’s up from 13.81% in July. Citigroup’s (C) bad credit card loans rose to 12.14% in August, up from 10.3% in July, and JPMorgan (JPM) saw write-0ffs climb to 8.73% in August from 7.92% in July.
