Citigroup, Wells Fargo May Post Profit Jump on Credit Costs

By Hugh Son - Oct 17, 2011 6:09 AM GMT+0700

Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC) may post better third-quarter results as loan losses at the biggest U.S. lenders subside.

Citigroup may say that profit climbed 15 percent to $2.5 billion when it reports results at 8 a.m. in New York, according to the average estimate of analysts surveyed by Bloomberg. Wells Fargo, scheduled to report at the same time, may say earnings rose 18 percent to $3.9 billion. Bank of America, which reports tomorrow, may report $2.7 billion in profit, compared with a $7.3 billion net loss a year earlier.

“We expect banks to show further credit-quality improvement, primarily in commercial and industrial unsecured loans and credit-card loans,” David Hilder, an analyst at Susquehanna Financial Group LLLP, said in a Oct. 7 note.

Traditional lending may have to carry the companies instead of investment banking, a role reversal from recent quarters, as concern that Greece would default disrupted markets. JPMorgan Chase & Co. (JPM), the second-largest U.S. bank by assets at midyear, said Oct. 13 that a slump in investment banking and trading pushed profit down 34 percent to $3.1 billion.

Commercial and residential loan growth fueled a 1.2 percent rise in total loans at the biggest 25 U.S. banks in the third quarter, Ed Najarian, analyst at International Strategy & Investment Group Inc., said in an Oct. 9 note. Deposits rose by 6.8 percent as customers sought safer assets, he wrote.

Consumer Banking

“Investors are well aware that trading, investment banking, and private-equity revenue at major U.S. banks was especially weak in the third quarter,” Najarian wrote. “Many investors may not be completely aware that core loan and deposit trends were quite good.”

Still, concerns over the European debt crisis and the possibility the U.S. economy may relapse into recession have weighed on bank shares. The 24-company KBW Bank Index has slumped 27 percent this year, and Bank of America, based in Charlotte, North Carolina and the biggest U.S. lender as of midyear, has plunged more than 50 percent.

A jump in borrowing costs at some banks, including New York-based Morgan Stanley, subsided earlier this month as investors became more optimistic that European Union policy makers would solve the sovereign debt and banking crisis.

Bank of America may perform poorly compared with peers in another U.S. recession, while New York-based JPMorgan may be best positioned, John E. McDonald, a Sanford C. Bernstein & Co. analyst, said in an Oct. 6 research note. Higher unemployment would cause more foreclosure and mortgage-related costs, he wrote.

Replacing Revenue

The third-quarter 2010 loss at Bank of America was fueled by a $10.4 billion writedown of its credit-card division after new U.S. regulations reduced its value. Last year, Chief Executive Officer Brian T. Moynihan said the bank would recoup lost revenue, without providing details.

This year, the firm added fee-based checking and said some debit-card users would be charged $5 per month. San Francisco- based Wells Fargo is testing a $3 monthly fee, and similar charges have been imposed by Regions Financial Corp. and SunTrust Banks Inc.

Bank of America’s plan sparked objections from critics including President Barack Obama. Five House Democrats asked Attorney General Eric Holder on Oct. 13 to investigate whether banks and trade groups colluded on decisions to impose new fees.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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