Bank Profits Mask Peril Still Lurking
Citi Makes Money, but Defaults Still Climbing
Saturday, April 18, 2009
Citigroup announced a surprisingly strong first-quarter profit yesterday, the latest bank to report a sharp improvement from the disastrous final months of 2008.
The earnings bloom, however, is probably a false spring, according to bank executives and financial analysts. Banks rise and fall with the economy. As prosperity recedes, more people and companies are defaulting on loans. The nation and its banks still face grave challenges, they said.
"We don't see the light at the end of the tunnel," Edward "Ned" Kelly, Citigroup's chief financial officer, said in an interview, referring to the state of the economy. His company, the most troubled of the large banks, reported that defaults increased during the first quarter on nearly every kind of consumer loan.
J.P. Morgan Chase also announced strong earnings this week. The company's chief executive, Jamie Dimon, also did not see in those results evidence of recovery.
Asked about loan losses in a call with analysts, he said: "Eventually they will peak, but they've been going up consistently. We've shown you here that they're going to go up even more. They're going to continue going up in all the home lending areas, mortgage and home equity and credit cards."
Large banks have profited despite their problems because of accounting maneuvers and earnings from investment banking.
The banking industry's bleak tone contrasts with recent expressions of cautious optimism by President Obama and Federal Reserve Chairman Ben S. Bernanke. The president said last week that he saw "glimmers of hope across the economy," such as signs that spending on homes and consumer goods might stop falling.
Bank executives are more downbeat, according to some analysts, because banks are suffering more during this recession than other sectors as a whole. This is unusual. It is a well-established industry rule of thumb, for example, that the proportion of credit card loans in default roughly equals that of Americans without jobs. But the collapse of the housing bubble has destroyed vast amounts of wealth, pushing people to default on other kinds of loans, including credit cards.
The nation's unemployment rate stands at 8.5 percent, but Citigroup, for example, reported a 10.2 percent loss rate on domestic credit card loans in the first quarter.
The struggles of financial firms also reflect the limited success of the government's massive efforts to help banks, including the Treasury Department's investment of almost $200 billion in more than 500 banks and the Federal Reserve's extension of more than $1 trillion in emergency loans through various programs.
The government programs were intended to help banks increase lending, at least above the levels without government aid. But the volume of loans made by the largest banks -- which received most of the federal aid -- has continued to decline, in part because losses continue to rise on the loans banks do make. Also economic woes have diminished demand for loans, particularly among businesses.
Despite these problems, Citigroup said yesterday it earned $1.6 billion in the first quarter, compared with a loss of $5.11 billion in the first quarter last year. The company paid out all its profits and then some to preferred shareholders, leaving a net quarterly loss of 18 cents per share. The overall profit still surprised financial analysts, who expected the company to lose money.