Robust profits mask problems in bank sector

Monday, April 20, 2009 at 9:17 PM Posted by Beijing News


A string of surprisingly strong earnings reports suggests US banks are emerging from a near-death experience, but some analysts say the troubled sector faces more pain.

Bank of America on Monday joined the parade of financial firms reporting robust results -- a profit of 4.2 billion dollars in the first quarter, beating its performance for all of 2008.

Last week, Citigroup, JPMorgan Chase and Goldman Sachs all topped expectations with strong profits, a hopeful sign for an industry critical to recovery from the severe recession. Wells Fargo said its results would show "record" profits in the January-March quarter.

The apparent renewed health of banking sector comes in part from record-low interest rates from the Federal Reserve, which has cut its base rate to near zero as part of an effort to stimulate lending and growth.

"The banks are benefitting from a jump in mortgage refinancing as well as the fact that with interest rates so low, they are able to borrow cheaply and therefore profit more from lending," said John Wilson at Morgan Keegan.

"It ought to be difficult for a bank not to make money in this environment."

But banks are also setting aside large chunks of cash for bad loans, suggesting they anticipate more mortgages and credit card debt may sour.

Bank of America for example added a hefty 6.4 billion dollars to its loan loss reserve. Citigroup charged off some 4.6 percent of its loans.

Although Citi managed to show a profit of 1.6 billion dollars in the first quarter after losses of more than 18 billion in 2008, some analysts were unimpressed.

Citi's results included "several one-time items which muddied the waters in assessing the franchises underlying performance," said Goldman Sachs analyst Richard Ramsden.

Some analysts say that below the surface, banks are still fragile and may face another round of deep problems ahead, especially if the economy remains weak.

Martin Weiss at Weiss Research called the surge in earnings "bogus," and a result of tricks including an easing of mark-to-market accounting rules.

"Regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices," he said. "Like magic, the bad assets are suddenly worth more."

Leahey said most banks have written off troubled mortgage securities but now face issues with rising defaults on other loans and credit cards.

"Banks are making money in traditional business lines but that could be swamped by a second tidal wave of losses tied to the economy," Leahey added.

Skewing bank results, say analysts, has been payments from bailed-out insurer American International Group AIG, which shelled out tens of billions of dollars to banks to cover soured investments or so-called credit default swaps.

Goldman Sachs, for example, received nearly 13 billion dollars from AIG before it posted a quarterly profit of 1.8 billion dollars.

"We know the banks are very impaired, they have a lot of problems," he said. "And we know they will get worse as long as the housing problems get worse."





REUTERS/Mario Anzuoni

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