Wednesday, January 20, 2010

Big Bank Earnings Contradict Economic Recovery Claims

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

In its recent earnings report, JP Morgan revealed that it had a bigger loss in its retail financial services division in the fourth quarter of 2009, than it did at the height of the Credit Crisis in Q4 2008. Bank of America and Citibank earnings reports for last quarter also indicate that their lending and consumer credit operations remain troubled and that a U.S. economic recovery has yet to take place. The banks are only making money from their investment banking operations and this has offset major losses from lending activities - the core business for any bank.

The loss for JP Morgan in its retail financial services division (which includes mortgages) was $399 million in Q4 2009. The bank lost $306 million in its credit card division and this number would have been even worse if there hadn't been a payment holiday during the quarter. JP Morgan's provision for credit losses was $7.28 billion last quarter. Despite the steep losses in its lending arm, JP Morgan still reported earnings of $3.28 billion or 74 cents a share.

Unlike JP Morgan, Bank of America didn't report positive earnings, but said it lost $5.2 billion or 60 cents a share in the fourth quarter. The bank charged off $8.4 billion in bad loans. While this indicates a severely damaged loan portfolio, it was $1.2 billion lower than in the third quarter. Credit Card losses were $1.03 billion and these were much higher than in the fourth quarter of 2008. Investing banking earnings were up and this kept the reported losses from being much worse.

Citibank also reported a loss in the fourth quarter, 33 cents versus a loss of $3.40 a year ago. Its revenue from trading and investment banking was up 5.9%.  There was a loss of $2.33 billion in it local consumer lending operations. As bad as this was, it was still better than the $4.89 billion loss in the fourth quarter of 2008. Net credit losses for the bank were $7.13 billion versus $7.97 billion from a year earlier. Citibank added $706 million to its loan loss reserves.

Earnings for the big banks indicate that the U.S. economy is still in severe recession. Their lending operations are still experiencing massive losses and in some cases these have gotten worse than during the bleakest days of the Credit Crisis. Earnings have been held up through investing banking operations, which in turn have been helped by changes in accounting rules. Illusions can only work for so long for financial companies however. Investors seem to have quickly forgotten what happened to Bear Stearns in 2008. It was about to report positive first quarter earnings before it went under in March of that year. It had an $18 billion funding reserve and claimed it was solvent right up to the end. Even though the company had a reported book value of around $90 dollar a share (the number was slightly different depending on the source), the U.S. government valued it at $2 a share in the takeover its arranged from JP Morgan. Apparently the real numbers can be much worse than the reported ones for U.S. financial firms and investors should keep this in mind.

Disclosure: None

NEXT: Trouble in Euro Zone Boosts Dollar, Lowers Commodities

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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