Volatility is the new weather for the likes of Citigroup and Bank of America. The two mega-banks joined JPMorgan Chase in blaming market ups and downs for crimping trading revenue and thus hurting overall earnings. That’s rich after years of claiming conditions were too docile. It doesn’t mask the deeper problem the lenders have, either.
Bank of America’s $2.7 billion of net income applicable to common shareholders in the fourth quarter equates to an annualized return on equity of just 4.8 percent. That’s after its chief executive, Brian T. Moynihan, completed probably the industry’s largest cost-cutting program ever, slashing $8 billion over a few years from expenses that totaled $59 billion in 2014, excluding interest and litigation costs.
Michael Corbat, his counterpart at Citi, presided over an even worse headline performance. The annualized return on equity in the fourth quarter was a minuscule 0.4 percent. That was dented by $3.5 billion set aside to cover legal costs. Investors knew about that already after the bank made two surprise announcements during the period.
Strip the litigation item out and the return on equity figure jumps to around 6.6 percent. That’s actually better than the 5.9 percent Bank of America managed on a comparable basis, with $350 million of legal costs and $600 million of accounting-related hits added back. The trouble is, these returns still fall well short. These two big banks aren’t getting close to covering the 10 percent cost of capital many investors use as a rule of thumb.
Even if the banks’ traders picked the right side of volatile markets, they couldn’t close the gap. In the last quarter, Citigroup and Bank of America both raked in about a fifth less buying and selling bonds, currencies and commodities than in the same period of 2013. If they had managed the same showing, their equity returns would have been around half a percentage point higher. Even factoring in the better showing in the third quarter of 2014 only adds a little more. Double-digit returns would still be out of reach.
Federal Reserve interest-rate increases could alleviate some of the pain. But without further cost cuts – or regulators suddenly allowing the return of a lot of capital to shareholders following upcoming stress tests – executives may need to find more excuses for poor earnings.
Citigroup Profit Plunges on Weak Trading and Legal Costs
The bank said profit fell to $350 million from $2.5 billion in the period a year earlier, weighed down by large legal charges and a greater than expected drop in trading revenue.
Bank of America’s Profit Falls 11%, Hurt by Consumer Loans and Investment Banking
The outstanding totals for every type of consumer loan fell at the bank in 2014, suggesting that lending to consumers remains lukewarm.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.