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American Banks: Two Good, Two Bad

This week, it's Q3 results time for US banks and the story appears to be one of two good banks and two bad banks.

The good are JPMorgan and Goldman Sachs, who have both delivered stonking results. The bad are, you guessed it, Bank of America and Citi who are both struggling with domestic credit market losses.

In particular, JPM has impressed as, even with the absorption of WaMu and Bear Stearns, they delivered a $3.6 billion net income for the quarter and build upon consistent Q2 and Q1 profits.

Goldman are the same, although their profits were slightly below expectation as their investment banking part of the business was a disappointment. That’s why the share price took a hit but they can still afford to give everyone a jolly good bonus.

Both banks have paid back TARP funds and are well on their way to a return to the good times, much to the annoyance of the taxpayer.

Even more annoying for the taxpayer is the two banks left.

Like HBOS and RBS in the UK, Citi and Bank of America are still plagued with consumer and business debts and defaults. Particularly worrying is the continuing impairment of mortgage lending, and now consumer and corporate lending. One example is credit cards where default rates are now rising above 10% according to JP Morgan’s latest results.

Finally, Citi and Bank of America are also still plagued with TARP repayments, the Troubled Asset Relief Program.  As a result, Ken Lewis was told not to take any pay this year by the US Payments Czar who can order such actions due to the debt owed to the government.

As JPM and Goldman have paid back their TARP, they've set aside over $37 billion in bonus payments so far this year.  Whilst Citi and Bank of America have this TARP burden to bear they really cannot compete and, instead, are easy targets for taking star traders, clients and profits.

Aw shucks.

Here's a brief summary of the key news and views:


$26.6 billion revenues, up 81% on same period in 2008 with fixed income driving profits in investment banking, including a $400 million gain on leveraged loans and mortgage-related securities that the bank had previously marked down

The second-biggest US bank made a net income of $3.6 billion (£2.5 billion) up 72% on equivalent quarter last year ($527 million)

$1.9 billion net profit from investment banking division

Strong performance in its investment banking division cancelled out losses on credit cards and consumer loans.

The consumer lending business posted a net loss of $1 billion, up from $659m in the same period of last year.

Card services made a net loss of $700m, which was an improvement on the $992m lost in the third quarter of 2008.

Investment banking business made net income of $1.9 billion, up from $1 billion in the third quarter of 2008.

JPMorgan said it had also benefited from the impact of buying most of the assets of Washington Mutual, which it acquired in September 2008 after it had been seized by regulators.

$2 billion set aside for consumer credit losses, taking total to $31.5 billion as more than 10% of credit card customers failed to pay debts

The bank repaid its $25 billion of US government rescue funds in June.

$7.3 billion set aside for bonuses taking this years tally to $21.8 billion


Goldman Sachs' net earnings for the three months to 25 September were $3.19 billion (£1.96 billion), up from $845m in 2008, just before the Lehman collapse.

The profit figure was up from the same period in 2008, but it was lower than the $3.44 billion that Goldman made in the previous three months.

The bank paid back the emergency loan it had received from the government in July this year.
It has come through the financial crisis relatively well, having been less exposed to the mortgage-related debt that crippled many of its peers.

Goldmans is doing particularly well thanks to the revival in world financial markets with most of its money from trading in stocks, bonds, currencies and commodities – a high risk, high reward strategy which other banks cannot replicate

Revenue from its mergers and acquisitions operations fell sharply from the previous quarter, reflecting the continuing lack of activity.  This caused investment banking revenues to fall to $899 million, 31% worse than same quarter last year and 38% down on last quarter due to declines in bond underwriting

Increased this year’s bonus pool to $16.71 billion (47% of net revenue)


$101 million net income but $529 million losses on continuing operations before taxes

Net revenues up 25% to $20.39 billion although revenues in the Securities and Banking Unit were down a third to $4.89 billion

$100 billion in writedowns and consumer credit losses so far

$8 billion in credit losses, compared with $4.9 billion in same quarter last year

Citi made $101m in the period, down from $4.28 billion in the previous quarter but up from a $2.82 billion loss in the same period of 2008.

In Q2, Citi reported a $4.3 billion second-quarter profit because of gains on its Smith Barney deal but its primary banking businesses continue to suffer from rising credit losses.

Citi is more exposed to consumer loans and has more bad debts.
It got a $45 billion bailout from the US govt – The Treasury Department now owns a 34 percent stake in the bank after converting a portion of the $45 billion in rescue funds Citi received last year.


Bank of America posted a $1 billion third-quarter loss compared with a profit of $1.18 billion a
year earlier.

Total revenue increased 32% to $26.4 billion.

Results were helped by profits from Merrill Lynch with gains
from trading bonds, stocks and currencies. Losses on home
lending and insurance widened to $1.6 billion from $724 million,
and the loss on credit cards expanded to $1.04 billion from $167

The bank said the provision for credit losses was
$11.7 billion, with $9.6 billion of loans considered

Reserves for future losses increased by $2.1
billion, compared with a $4.7 billion addition in the previous
quarter. The bank’s reserve is now 4% of total loans, compared with 4.7% at JPMorgan and 5.9% at Citigroup.

Net write-offs of uncollectible loans
rose 11% from the second quarter to $9.62 billion. The
bank wrote off $3.2 billion of home loans, including home equity
loans, during the quarter, up 10% from the second
quarter. Charge-offs on credit cards increased 5% to
$2.17 billion.

CEO Ken Lewis is stepping down at the end of the year and his abrupt resignation and the lack of clarity on his successor are contributing some uncertainty surrounding the stock.

Bank of America earned $3.2 billion last quarter.

Bank of America needs to clarify its position on TARP. It would be a very positive sign to pay down some of their TARP as they have only paid $1.83 billion of the $45 billion due.

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About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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