JPMorgan, Goldman Profit Probably Rose as Citigroup Lost Again

By Bradley Keoun and Elizabeth Hester

Oct. 8 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc., the largest banks to repay U.S. bailout funds, will probably post the industry’s biggest third-quarter profit gains while Citigroup Inc., still gripping its government lifeline, reports another loss.

Earnings at JPMorgan may have almost quadrupled to $2.05 billion from the height of the financial crisis a year earlier, according to analysts’ average estimates in a survey by Bloomberg. Goldman Sachs’s profit probably almost tripled to $2.3 billion. Citigroup’s expected $2.58 billion loss would mark its sixth unprofitable quarter in the past eight.

“We’re seeing a bifurcation of the banking industry between the haves and the have-nots,” said Matt McCormick, a banking-industry analyst at Bahl & Gaynor Inc. in Cincinnati, which manages $2.5 billion.

JPMorgan, based in New York, is benefiting from its No. 1 ranking among underwriters of stock and equity-linked securities for the year, as well as dollar-denominated debt sales. At Goldman Sachs, whose shares are the best-performing of the biggest U.S. banks in 2009, revenue from trading has surged to a record as competitors including Morgan Stanley scaled back their riskiest bets.

The relative strength of the firms is reflected in the market for credit-default swaps, used to insure company bonds against default. Investors must pay about $67,000 a year to insure $10 million of JPMorgan bonds for five years, and $109,000 for Goldman Sachs’s bonds. That compares with $207,000 at Citigroup, $138,000 at New York-based Morgan Stanley and $115,000 at Bank of America Corp., based in Charlotte, North Carolina.

They cost $81,600 at San Francisco-based Wells Fargo & Co., the fourth-biggest U.S. bank by assets.

Dimon’s Forecast

JPMorgan Chief Executive Officer Jamie Dimon has predicted more losses on consumer loans and said in July that credit cards won’t be profitable this year or next. Costs for bad consumer loans will also climb at Bank of America and Citigroup, Oppenheimer & Co. analyst Chris Kotowski wrote in a Sept. 29 report.

“The consumer is going to be a problem,” said Barry James, CEO of Xenia, Ohio-based James Investment Research Inc., which oversees $2 billion. “A lot are underwater on their homes” and many are unemployed, he said.

Wells Fargo’s profit may have jumped 36 percent to $2.23 billion, according to the survey. At Morgan Stanley, where analysts are predicting a profit decline of 49 percent, the firm probably had to book accounting costs to write up the value of its own debt as markets improved, Sandler O’Neill & Partners analyst Jeff Harte said in an interview.

‘Causing Pain’

“We’re in a better environment certainly than we were six months ago, but a lot of the things that were causing pain last year haven’t completely run through the system,” Harte said.

Goldman Sachs may be a “long-term market-share winner,” CLSA analyst Mike Mayo wrote earlier this week, as he upgraded the stock to “outperform” from “underperform” and raised his price target to $230 from $194, compared with $190.48 at the close yesterday.

“Trading results are likely better than others, helped by an ability to stick to the same process that has helped it in the past,” Mayo wrote.

Morgan Stanley “dialed back some of the risk-taking and trading because they felt a little more capital-stressed than Goldman did, and now they are behind,” Harte said. Morgan Stanley’s stock has roughly doubled this year.

Loan Provisions

Analysts at Keefe, Bruyette & Woods predicted in an Oct. 1 note that Bank of America would have a third-quarter loss of 22 cents a share, “primarily on the continuation of high provisioning,” which are costs to set aside reserves to cover bad loans.

Bank of America’s third-quarter loan-loss provisions probably rose 74 percent to $11.2 billion, according to Oppenheimer’s Kotowski. Citigroup may have set aside $10.4 billion, up 18 percent, and JPMorgan’s loss provisions probably increased 36 percent to $7.87 billion, Kotowski wrote.

JPMorgan may be “near the end of building its reserves,” according to the Keefe report, “given the company’s strong balance sheet and loan-loss reserves.”

Goldman Sachs has climbed 126 percent this year on the New York Stock Exchange, while JPMorgan gained 45 percent. That compares with a 23 percent gain at Bank of America and a 31 percent decline at Citigroup. Wells Fargo shares are down 0.8 percent this year.

TARP Repayments

JPMorgan repaid its $25 billion of rescue funds from the Troubled Asset Relief Program in June, and Goldman Sachs and Morgan Stanley repaid $10 billion each the same month.

Bank of America and Citigroup have yet to repay the $45 billion of government bailout funds they each took last year to weather the worst financial crisis since the Great Depression. Wells Fargo has a $25 billion outstanding balance.

Wells Fargo has been slower than some of its rivals to build up loan-loss reserves, and earnings may stall as the expense of adding to them continues into next year, Credit Suisse analyst Moshe Orenbuch said. Wells Fargo’s reserves covered 2.8 percent of total loans as of June 30, compared with 3.6 percent at Bank of America, 4.3 percent at JPMorgan and 5.6 percent at Citigroup.

“Wells hasn’t repaid the TARP, and levered up its balance sheet to buy Wachovia” Corp., one of the five-biggest U.S. banks before it collapsed last year, Orenbuch said. “They don’t have a strong balance sheet.”

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.