Bloomberg News

JPMorgan, Citigroup Revenue Struggle Draws Analysts’ Focus

July 13, 2011

(Updates to add Bank of America’s forecast in 10th paragraph.)

July 13 (Bloomberg) -- JPMorgan Chase & Co. and Citigroup Inc., which report earnings this week, are under pressure to show that banks can increase revenue as the U.S. economic recovery sputters.

JPMorgan, set to announce results tomorrow, may say second- quarter revenue declined 0.8 percent to $24.9 billion, according to the average estimates of analysts surveyed by Bloomberg. Revenue at Citigroup, which reports results a day later, may fall 10 percent to $19.9 billion, with more than half the decline tied to assets the company has tagged for sale.

“The street is going to be looking at revenue growth” that will be difficult for banks to produce in the current economic environment, Paul Miller, an analyst with FBR Capital Markets, said in a phone interview. “You need the economy to work, you need rates to go higher and you need to see continued improvement in credit.”

Boosting profit won’t be enough to impress investors, according to analysts including Miller, a former examiner at the Federal Reserve Bank of Philadelphia. They already know that fewer borrowers are defaulting, allowing banks to bolster profit with funds that had been set aside for future loan losses.

JPMorgan, led by CEO Jamie Dimon, 55, may say second- quarter profit climbed 6.2 percent from a year earlier to $5.09 billion according to the average estimate of analysts surveyed by Bloomberg. Citigroup may say profit rose 14 percent from the same period last year to $3.07 billion.

Bonds, Equities

The sovereign debt crisis in Europe and slowing economic growth in the U.S. depressed trading volume and curtailed revenue in the second quarter as investors bought and sold fewer bonds and equities, according to analysts including Chris Kotowski at Oppenheimer & Co. in New York.

U.S. central bankers said last month that the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. The revised outlook was the second time this year that Federal Reserve officials lowered their forecasts for growth.

Home prices have fallen since mid-2010 and will continue to suppress bank revenue and earnings for the foreseeable future, analysts said. A further decline in property values of 10 percent to 25 percent over the next five years “wouldn’t surprise me at all,” Robert Shiller, who helped create the S&P/Case-Shiller Index of property values, said last month.

‘Going to Struggle’

“If you’re a short-term investor, banks are going to struggle, probably for the next six to 12 months,” said Michael Yoshikami, chief executive officer and founder of YCMNet Advisors in Walnut Creek, California, which manages about $1.1 billion, including Citigroup shares. “When you have slow economic growth and you have more stringent credit requirements, they’re just making less loans.”

Earnings at Bank of America Corp., the nation’s largest lender by assets, were wiped out during the quarter by expenses linked to mortgages that soured during the housing crisis.

The bank said June 29 it expects to report a second-quarter loss of $8.6 billion to $9.1 billion driven by $20.4 billion in charges, including a settlement of disputes over home loans, provisions for future claims, legal costs and a writedown of mortgage-unit goodwill. Excluding these expenses and gains from asset sales, the Charlotte, North Carolina-based lender said it would have posted as much as $3.7 billion in profit.

Goldman, Morgan Stanley

Total trading revenue at the five biggest Wall Street banks -- Goldman Sachs Group Inc., Morgan Stanley, JPMorgan, Citigroup and Bank of America -- may have dropped 4.4 percent to $21.7 billion in the second quarter, compared with the same period last year, and 17 percent from last quarter, Kotowski said. Trading accounted for almost a quarter of the firms’ revenue last year.

“Investors are likely to be disappointed with second- quarter results for the universal banks as the combination of challenging trading and interest rate environment is likely to result in declining revenue trends,” KBW Inc. analysts led by David Konrad wrote in a June 29 research note. They projected an 8 percent drop in industry revenues from last year.

JPMorgan and Citigroup may counter declines in trading revenue with an increase in fees from investment banking, which includes managing sales of equities and bonds as well as advising on mergers and acquisitions.

Expanding Abroad

James Staley, JPMorgan’s investment-banking chief, may increase revenue from those businesses by 28 percent to $1.8 billion, according to Moshe Orenbuch, a New York-based analyst at Credit Suisse AG. Citigroup’s investment-banking unit, run by Ray McGuire, may also post a 28 percent gain to $865 million, estimates provided by Orenbuch show.

Citigroup CEO Vikram Pandit, 54, aims to mitigate declining U.S. revenues by expanding abroad, according to Richard Staite, a London-based analyst with Atlantic Equities LLC. Citigroup got 62 percent of first-quarter revenue outside North America.

Revenue from Latin America, Asia, Europe, the Middle East and Africa may climb 7.7 percent to $4.67 billion at Citigroup’s regional consumer bank while dropping 10 percent to $3.31 billion in North America, according to Staite.

The lender’s Citi Holdings unit, which includes assets Pandit tagged for sale in January 2009, may post a $1.59 billion plunge in revenue, accounting for more than half the bank’s overall decline, according to Staite.

‘Slightly Skeptical’

Citigroup’s increased lending abroad has been accompanied by higher expenses, which are eroding profit, Staite said in a phone interview. Consumer banking income from continuing operations in international markets may fall 7.1 percent to $1.01 billion in the second quarter compared with the same period last year, Staite’s estimates show.

“For the time being, they’re still in investment mode,” Staite said. “That’s why investors remain slightly skeptical about whether Citigroup can be successful in those countries.”

The release of loan-loss reserves accounted for $2.55 billion, or almost half, of JPMorgan’s record first-quarter profit of $5.56 billion. Citigroup would have reported a loss for the three months ended March 31 if it hadn’t drawn down $3.37 billion in reserves.

When banks beat profit estimates by continuing to release reserves, investors view the earnings as being of “poor quality” and focus on the banks’ “underlying fundamentals,” Miller said.

--Editors: Peter Eichenbaum, David Scheer

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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