Free Annual Reports
Predators And Prey Of The Banking Sector
America's two largest banks reported dismal numbers as they continue to reel from problems in the markets. On Friday, Citigroup (NYSE:C) reported a second consecutive quarterly loss, and on Monday, Bank of America (NYSE:BAC) reported a 77% drop in profits. Investors boosted up Citi's shares on the hopes that the end is near, but I wouldn't be too hopeful just yet.
Citi Shows its Weakness
Citigroup reported another massive loss as the company wrote down around $12 billion of mortgage and credit related investments. Citigroup posted a staggering net loss of $5.1 billion ($1.02 per share) when compared with the first quarter of 2007, which saw a $5 billion profit ($1.01 per share). The write downs came from all over: $6 billion came from sub-prime related direct exposures, $3.1 billion on highly leveraged finance commitments, $1.5 billion related to exposure to monoline insurers, and $1.5 billion on auction rate securities inventory. The company was also hit with a $3.1 billion increase in credit costs for its Global Consumer Group.
The company is in a bad place right now. The credit problems have reverberated through all divisions. Even the company's wealth-management division, which was expected to still hold up, saw profits fall 33%. CEO Vikram Pandit highlighted the fact that the company has raised more than $30 billion in December and January. As with all of this unprecedented capital raising, it is good in that it keeps the company afloat, but it will certainly be a drag on the stock. Shares rose more than 4% on the news, mainly because the results were largely in line with analyst views. Hopes rose that the worst is over for Citi, but I wouldn't be so sure, and would recommend staying away from the shares. (To learn how to break down a bank's complex balance sheet, read Analyzing A Bank's Financial Statements.)
The Lean and Hungry
Bank of America didn't post a massive loss like Citi, but did disappoint the market. On Monday, the nation's second largest bank posted net income of $1.21 billion (23 cents per share), a decline of 77% from profits of $5.26 billion ($1.16 per share) a year earlier. The results missed analyst EPS estimates of 45 cents per share. Revenue dropped 6% to $17 billion, but came in ahead of analyst expectations. According to CEO Ken Lewis, the results did not meet management expectations either. He noted in the press release that "weakness in the economy and prolonged disruptions in the capital markets took their toll on [Bank of America's] performance."
The results were hurt by trading losses and a $3.3 billion increase in loan reserves. Shares slipped slightly on the news, but I think investors realize the relative strength in certain financials like Bank of America and JPMorgan Chase (NYSE:JPM). Despite the 77% profit slip for BofA and the 50% slip for JPMorgan last week, these companies have not seen the cataclysmic problems of Citi and many of the investment banks. These companies still have a firmer footing, which puts them in positions to buy out other struggling companies like Countrywide Financial (NYSE:CFC) and Bear Stearns (NYSE:BSC).
The Bottom Line
The financial sector is in shambles, as displayed by the continued losses, profit drops and write downs from the country's biggest banks. But some banks are still on solid ground, leaving them in a position to take advantage of the current crisis and creating attractive future prospects.
The market is still ugly for financials, and I wouldn't be a buyer of Citi anytime soon. But if you are inclined to look at this sector, look at the companies that are still strong enough to take advantage of the opportunities that are being created, these include Bank of America, JPMorgan, and even Wells Fargo (NYSE:WFC).
Citi Shows its Weakness
Citigroup reported another massive loss as the company wrote down around $12 billion of mortgage and credit related investments. Citigroup posted a staggering net loss of $5.1 billion ($1.02 per share) when compared with the first quarter of 2007, which saw a $5 billion profit ($1.01 per share). The write downs came from all over: $6 billion came from sub-prime related direct exposures, $3.1 billion on highly leveraged finance commitments, $1.5 billion related to exposure to monoline insurers, and $1.5 billion on auction rate securities inventory. The company was also hit with a $3.1 billion increase in credit costs for its Global Consumer Group.
The company is in a bad place right now. The credit problems have reverberated through all divisions. Even the company's wealth-management division, which was expected to still hold up, saw profits fall 33%. CEO Vikram Pandit highlighted the fact that the company has raised more than $30 billion in December and January. As with all of this unprecedented capital raising, it is good in that it keeps the company afloat, but it will certainly be a drag on the stock. Shares rose more than 4% on the news, mainly because the results were largely in line with analyst views. Hopes rose that the worst is over for Citi, but I wouldn't be so sure, and would recommend staying away from the shares. (To learn how to break down a bank's complex balance sheet, read Analyzing A Bank's Financial Statements.)
Bank of America didn't post a massive loss like Citi, but did disappoint the market. On Monday, the nation's second largest bank posted net income of $1.21 billion (23 cents per share), a decline of 77% from profits of $5.26 billion ($1.16 per share) a year earlier. The results missed analyst EPS estimates of 45 cents per share. Revenue dropped 6% to $17 billion, but came in ahead of analyst expectations. According to CEO Ken Lewis, the results did not meet management expectations either. He noted in the press release that "weakness in the economy and prolonged disruptions in the capital markets took their toll on [Bank of America's] performance."
The results were hurt by trading losses and a $3.3 billion increase in loan reserves. Shares slipped slightly on the news, but I think investors realize the relative strength in certain financials like Bank of America and JPMorgan Chase (NYSE:JPM). Despite the 77% profit slip for BofA and the 50% slip for JPMorgan last week, these companies have not seen the cataclysmic problems of Citi and many of the investment banks. These companies still have a firmer footing, which puts them in positions to buy out other struggling companies like Countrywide Financial (NYSE:CFC) and Bear Stearns (NYSE:BSC).
The Bottom Line
The financial sector is in shambles, as displayed by the continued losses, profit drops and write downs from the country's biggest banks. But some banks are still on solid ground, leaving them in a position to take advantage of the current crisis and creating attractive future prospects.
The market is still ugly for financials, and I wouldn't be a buyer of Citi anytime soon. But if you are inclined to look at this sector, look at the companies that are still strong enough to take advantage of the opportunities that are being created, these include Bank of America, JPMorgan, and even Wells Fargo (NYSE:WFC).
Free Annual Reports
