Bumper US Banking Profits

5th August 09 - Bumper US banking profits

It may seem surprising, even baffling, but the big US investment banks that were in so much trouble last autumn have sprung back into life. First we had Goldman Sachs, then JP Morgan Chase and now it’s the turn of Bank of America and Citi Holdings to hold the torch high.

In the second quarter of 2009, Citi Holdings which was the hardest hit by the credit crisis and had to tap the Treasury for $45bn of state aid, recorded a profit as a result of a $6.7bn gain from merging its Smith Barney brokerage into a joint venture with Morgan Stanley (three hearty cheers for the accountants). This windfall raised net income (profit) to $4.28bn compared to the $2.5bn loss recorded in the equivalent period last year. Even without this one-off gain, the 26 cents-a-share loss was less than had been expected. The investment banking and trading division increased its operating income by 16% to $2.84bn whilst the brokerage and asset management gains more than offset losses from consume finance and the winding down of toxic debt. The overall favourable outcome at Citi came despite an increase in bad debt provisions of $3.9bn.

Meantime, over at B of A, a quarterly profit of $2.42bn was reported and this in the face of a whopping bad debt provision of $13.4bn. The exceptional item for this bank was a $5.3bn gain from selling part of its stake in China Construction Bank. Trading at B of A enjoyed a bumper crop (of spreads) helped much by the acquisition of Merrill Lynch.

It all goes to show how things can turn around given a liberal dose of state aid and less competition and an instinctive willingness to fight back.

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