Bloomberg News

U.S. Banks Fall as Wells Fargo, Citigroup Say Revenue Slumped

October 17, 2011

Oct. 17 (Bloomberg) -- U.S. banks fell after Citigroup Inc. and Wells Fargo & Co., the nation’s third- and fourth-largest lenders, said quarterly revenue dropped amid economic weakness and market turmoil linked to Europe.

Wells Fargo slid 7.3 percent, the most since Aug. 10, to $24.72 at 12:49 p.m. in New York trading, leading a 3 percent decline in the 24-company KBW Bank Index. Citigroup slipped 1.3 percent to $28.02.

Investors focused on Wells Fargo’s 6 percent slump in revenue from a year earlier as U.S. banks struggle with low interest rates and 9.1 percent unemployment. While third-quarter profit at Well Fargo rose 22 percent to $4.06 billion, a record, its $19.6 billion in revenue missed the $20.2 billion estimate of analysts surveyed by Bloomberg.

“The economic recovery has been more sluggish and uneven than anyone anticipated,” Chief Executive Officer John Stumpf said a statement. “We can’t change the economic environment, yet we have worked hard to control the variables we can.”

Citigroup’s net income jumped 74 percent to $3.77 billion including a $1.9 billion accounting gain, known as a credit- valuation adjustment. The firm’s $1.23-per-share profit beat the 82-cent average estimate from 25 analysts. It was the third- largest U.S. bank by assets at midyear, ahead of Wells Fargo.

Stock Plunge

The CVA helped Citigroup’s securities and banking unit post a $2.14 billion profit compared with $1.36 billion for the same period last year and $1.19 billion in the previous quarter. Excluding the CVA, revenue tumbled across all trading and investment-banking businesses amid market turmoil caused by the sovereign debt crisis in Europe and concerns that the global economy was weakening, the bank said.

The accounting adjustment helped Chief Executive Officer Vikram Pandit, 54, weather a quarter in which the firm’s shares tumbled 38 percent, spurred by concern that revenue from trading and investment-banking would drop because of Europe’s debt crisis and the U.S. debt-ceiling fight. Excluding the adjustment, revenue dropped 8 percent.

“When an investor looks at the results, they should look at the core operations,” said David Knutson, a credit analyst with Legal & General Investment Management in Chicago. “The CVA will offset the operating weaknesses primarily in investment banking.”

Cost Cuts

Stumpf, 58, has focused on cutting costs as the U.S. economy and jobless rate helped keep borrowers on the sidelines. His Project Compass aims to reduce expenses at the San Francisco-based lender by $1.5 billion a quarter by the end of next year. Rivals including Bank of America Corp. are cutting employees, and Wells Fargo said today it plans on “streamlining” some staff functions.

The bank’s net interest margin, the difference between what it pays to borrow and what it earns on loans and securities, narrowed to 3.84 percent from 4.01 percent in the second quarter, the company said. About 0.12 percentage point of the change was attributed to $41.8 billion in new deposits invested in short-term assets.

“Given this low-rate environment, I think investors are very focused on direction of bank margins, and Wells was a little bit weaker than expected on the net interest margin,” David George, an analyst at Robert W. Baird & Co. in St. Louis, said in an interview with Betty Liu on “In the Loop.”

The firm’s profit of 72 cents a diluted share met the average estimate from a survey of 30 analysts.

Improved Lending

Wells Fargo reported $1.83 billion in mortgage banking revenue, a 13 percent gain from the second quarter, with a 40 percent increase in mortgage originations to $89 billion. The value of the mortgage servicing business declined 16 percent to $12.4 billion, the bank said.

The company set aside $1.8 billion to cover loan losses, with net loan write-offs of $2.6 billion, for a pretax reserve release of $800 million. Nonperforming assets declined to $26.8 billion from $27.9 billion in the preceding quarter.

Most of Citigroup’s accounting gain stems from a rule that required Citigroup to write down the value of its debts as investors grew less confident of the bank’s ability to repay them during the quarter. This led to a widening of the bank’s credit spreads, the extra yield investors demand to own a corporate bond rather than U.S. Treasury notes. Credit-default swaps tied to Citigroup’s debt, which typically climb as investor confidence deteriorates, soared during the quarter.

Trading Performance

Revenue from fixed-income trading excluding the accounting change fell 33 percent to $2.3 billion from about $3.5 billion in the same period last year and $3.03 billion in the second quarter of this year.

Revenue from trading equities tumbled 73 percent to $289 million from $1 billion last year and from $812 million in the second quarter, excluding the CVA gain. The bank blamed a slump in revenue from “principal strategies,” which includes proprietary trading, where Citigroup places its own money on market bets. Revenue from the trading of derivatives, contracts whose value is derived from financial instruments including shares, also declined.

Fees from investment banking, which includes advising clients on mergers and acquisitions as well as managing sales of customers’ bonds and shares, fell 21 percent to $736 million from $930 million last year, the bank said. Profit in the transaction-services unit slid 3 percent to $892 million as expenses tied to “continued investment spending” increased 17 percent to $1.44 billion.

--With assistance from Charles Mead in New York. Editors: David Scheer, Rick Green

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.

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


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