The Crisis Hasn't Ended for Some Banks

01/18/2013 2:00 am EST


Jim Jubak

Founder and Editor,

The earnings reports of major institutions like Citi and Bank of America paint a picture of just how deep the hole remains, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Forget about such nuanced worries as a declining net interest margin or a cut in share buybacks. Those are problems for investors in healthy banks such as JPMorgan Chase (JPM), Wells Fargo (WFC), and US Bancorp (USB) to worry about.

Fourth-quarter earnings announced yesterday before the New York markets opened by Citigroup (C) and Bank of America (BAC) say that those banks have more basic problems: lower than expected revenue and a continuing drag from their mortgage business.

Citigroup reported earnings of 69 cents a share, 27 cents a share below the Wall Street consensus of 96 cents a share. Revenue of $18.66 billion was below the Wall Street projection of $18.85 billion.

The earnings miss was a result of a continued parade of special charges, including $1.3 billion in legal changes, a $305 million charge for settling mortgage claims with regulators, a $1 billion charge for previously announced layoffs, and a $485 million writedown in the value of the bank's own debt.

Some of those charges were likely to be included in analyst estimates and some aren't. That makes it hard to tell exactly how much of the apparent 27 cents a share miss was an actual miss.

One big surprise, though, came in the bank's mortgage business. While banks such as Wells Fargo and US Bancorp spent part of their recent conference calls talking about taking market share in the mortgage business, Citigroup seemed to be saying that, from its perspective, the mortgage crisis wasn't over.

The bank reported that it had released only $86 million in loan-loss reserves to earnings in the quarter. That's a huge drop from the $1.5 billion release in the fourth quarter of 2011 and the $900 million release in the third quarter of 2012.

The bank did continue to work down troubled assets in Citi Holdings, its bad bank. Assets in Citi Holdings fell $69 billion to $156 billion from the fourth quarter of 2011. At the end of the quarter, the bank's Basel III Tier 1 Common Ratio was 8.7%.

Bank of America reported fourth-quarter earnings of 3 cents a share, a penny above the Wall Street consensus. But the bank badly missed on revenue, reporting $18.9 billion when Wall Street was projecting $20.72 billion.

The biggest disappointment in the quarterly report, though, was the inability of the bank to put its legal problems behind it. In the fourth quarter, the bank took $2.7 billion in provisions for representations and warranties and compensatory fees, $1.1 billion in provisions for the Independent Foreclosure Review agreement, and $900 million for litigation.

You'd think that the company's settlement with Fannie Mae (FNMA), which reduced representations and warranties by more than $12 billion, would have marked an end to the quarter-by-quarter torture of Bank of America shareholders.

But at the same time as this settlement was reducing representations and warranties, new claims in the fourth quarter came in to the tune of $4.5 billion. A whopping 43% of those new claims came from parties other than government-sponsored entities such as Fannie Mae. I think this demonstrates that there's another layer of lawsuits out there yet to be settled.

Bank of America continues to show progress on its balance sheet, with a projected Basel III Tier 1 common ratio of 9.25% as of December 31. But it remains very hard to tell what this bank-or Citigroup-are worth as businesses. They're still, I'd say, works in progress.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of September, see the fund's portfolio here.

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