Are Goldman, JPMorgan, and Bank of America the new pillars of Wall Street?
Thanks to the good work of Hank Paulson, the world is much safer for Goldman Sachs Group (GS), and JPMorgan Chase (JPM) has pulled away from the pack as well. Paulson did his part by letting Lehman Brothers fail and forcing Bank of America (BAC) to swallow the scorpion -- Merrill Lynch. But B of A looks like it's going to join Goldman and JPMorgan in the winner's circle while Citigroup (C) -- which has $351 billion in bailout money -- could be circling the drain.
Citi -- which has $45 billion in TARP money and another $301 billion in loan loss guarantees from the U.S. -- reported its seventh consecutive quarterly loss; analysts polled by Thomson Reuters expected Citi to lose 37 cents a share in the second quarter but it lost 10 cents less than expected, 27 cents a share. And sadly, Citi's costs for bad loans in the quarter jumped by 75 percent to $12.2 billion while late credit card loans increased to three percent of the total, from 2.1 percent a year earlier.
Fortunately, all is not lost -- B of A reported a huge second quarter profit, which declined less than expected. B of A's net income fell 5.5 percent to $3.22 billion, or 33 cents per diluted share, from $3.41 billion, or 72 cents -- this was 83 percent higher than the 15 cents a share that the average analyst expected. But there was a wide range of estimates from a loss of 11 cents to a profit of 50 cents, due to different assumptions about accounting for one-time items.
The good news for B of A was from a surge in mortgage refinancing and corporate banking. It enjoyed revenue growth in mortgage financing, investment banking, wholesale capital markets business and in home loans. And it expects to achieve 40 percent of its original goal of $7 billion in cost cuts this year from its merger with Merrill Lynch.
But there are big problems in B of A's loan portfolio. The money it sets aside for potential losses -- credit-loss provisions -- more than doubled from a year earlier, while the net charge-off rate also spiked to 3.64 percent from 1.67 percent a year earlier. Credit-card managed losses doubled to 11.7 percent from 5.96 percent a year ago, and total nonperforming assets nearly tripled to 3.31 percent from 1.13 percent in the prior year.
But Ken Lewis is looking like he's in solid shape after raising $38 billion in capital following the stress tests. Meanwhile, Citi is looking like the odd man out -- maybe it's time to put it out of our misery by selling its profitable pieces to the survivors and liquidating the rest.
Peter Cohan is president ofPeter S. Cohan & Associates. He alsoteaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.