"This is a great time to be a banker," New York Times columnist Floyd Norris says, somewhat tongue-in-cheek. Jabs about bailouts and huge bonus payments aside, it's true that banking system is finally seeing rational pricing of risk -- and that means earnings power has greatly increased for deposit-taking banks. If you have a savings account or money market, you might have noticed that your interest payments have dried up to a pittance; the interest you aren't being paid is dropping through to banks' bottom lines.
Looking at today's earnings report from Citigroup, Inc. (NYSE: C), for example, is useful to see how the economics of the industry function, and whether Citicorp -- the "good bank" as Citigroup works to split itself -- will live up to the promise CEO Vikram Pandit attributes to it. In a company press release, Pandit said, "Citicorp is our core franchise and will be the source of Citi's long term profitability and growth. Citicorp is unique with institutional and consumer businesses operating on an unmatched global footprint."
Citicorp made more than $3 billion on the quarter, but more than 90% of that is attributable to the Institutional Clients Group -- and within ICG, less than 7% of that profitability came from North American operations. In a sense, the retail/institutional customer diversification and the geographic scope is a crutch hiding the poor performance domestically. The company blamed losses on credit cards for the inability to turn a profit on consumer banking in North America.
One important datapoint for Citi's North American retail operations is that net credit losses as a percentage of loans accelerated more than it has at any point since the start of 2008, increasing 30% since the prior quarter. As credit losses get worse -- charges for first and second mortgages also spiked -- but the rate of increase in delinquencies slows, it does offer the glimmer of hope that the bottom of the consumer credit cycle will occur in the next few quarters. The percentage of mortgage and credit card loans 90+ days past due rose across the board compared to the first quarter of this year, but not as sharply as previous trends.
The issue of failure for Citigroup has largely been taken off the table, thanks to the actions of the government. Now, it's a matter of waiting and allowing the extraordinarily low Fed Funds rate to keep costs down, letting the banking system work off its bad loans. The average interest rate paid by Citigroup on deposits was 112 basis points (1.12%) lower than in the same quarter of 2008, which saved the bank more than $2.2 billion. This "silent bailout" will only help Citigroup return to stable footing, but it's going to help stronger banks with better assets post great numbers.
James Cullen also edits and writes at CollegeAnalysts.com. He has no personal position in the stocks mentioned above.
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Reader Comments (Page 1 of 1)
7-17-2009 @ 5:04PM
don hall bearcreekresearch said...
how are banks making money?
job losses are soon to be on par with 1929 at 10% -
housing mortgages are failing at astronomical rates -
credit cards are just beginning to crumble -
then I see big numbers being posted at Sachs, Citi even posted a surprise (so what, it is still all smoke and mirrors) there are no substantial reason for the failing majority to pay through the nose for oil and gas,
no possible reason to starting ya-hooing a stable market - no car sales, no stereo's and no hoola hoops!
has everyone forgotten the unheard of bizillions being pumped into BANKS?
So what you get a few housing starts - guess what, those banks have to show a little something for the BIG ASS SOMETHING they have received!
Forget the bull and look at the real main street, It is pure bad brother, bad to the bone.
so what you get a few yahoos making coins trading coins at Sachs ... the real economy sucks and sucks bad ... health care is a mind numbing game, war is a mind blowing proposition and the world economy is not going to buy the idea that CHINA is not soon going to sour on buying anymore of Uncle Sasquatch's Bonds.
Look, Floyd where in sam hell did you pick out the idea that the Next Few Quarters will find the Consumer Credit Cycle "What friggin' credit cycle - good loans, I mean GREAT loans are being given short shrift and good loans are being denied"
This kind of talk is as bogus as the lame ass line of b.S. that wallstreet sold for gold then went belly ... the B.S.?
Simply selling Risk short using that dumbass David Li gaussnian copula formula ... Ratings agencies being paid by the firm's they evaluate, and those firms such as Moody's, Standup & Pour, use very narrow data sets makes measuring government and corporate risk and less than adequate process.
No argument there - if so, you have not been alive for the last nine months, breathing, but not thinking.
The problem is leaving national and international Risk Assessment in the hands of cloak and dagger organizations and private profit scheming centers.