BofA and Citi earnings disappoint

Bank of America and Citigroup killed any lingering optimism for banks’ fourth-quarter earnings season, missing analysts’ estimates and sending the sector’s stocks to their lowest level since August.

Both banks reported sharper than expected declines in fixed income trading, with BofA’s revenues in the segment down 21 per cent and Citi’s down 14 per cent. JPMorgan earlier reported a 14 per cent decline, showing that Wall Street banks failed to navigate the whipsawing asset prices at the end of 2014.

Mike Mayo, analyst at CLSA, noted that the consensus earnings forecasts for the bank this year were below Citi’s own targets — “So I think that’s a way of saying the market doesn’t believe you” — and asked Mike Corbat, Citi chief executive, whether he had “the right team on the field”.

Mr Corbat said: “I feel very good about the team on the field” and said he would “let the board be the judge” of what should happen if Citi were again to fail annual Federal Reserve stress tests.

Legal and restructuring charges came close to overwhelming the bank’s profits for the three months to December. Citi had already warned last month it would take about $3.5bn in charges, leaving it “marginally profitable”.

But it revealed on Thursday it was more marginal than analysts had expected, owing to the revenue shortfall in trading. Net income fell to $350m from $2.5bn a year earlier. Earnings per share were 6 cents, down from 77 cents. Analysts had forecast about 10 cents a share.

Bank of America suffered a decline in profits in the fourth quarter, with hefty cost cutting unable to make up for a fall in revenue, though the results were clouded by three accounting charges.

Fourth quarter net income missed analysts’ estimates, falling from $3.4bn to $3.1bn. Revenue fell to $19bn from $21.7bn in the same period a year earlier. Earnings per share fell to 25 cents from 29 cents.

Analysts had expected BofA to make 31 cents a share and net income of $3.5bn.

BofA’s and Citi’s results came a day after JPMorgan Chase reported a fall in net income. Wells Fargo on Wednesday reported slightly higher profits in the fourth quarter.

BofA took three accounting adjustments, which together wiped $1.2bn from the results: a change to the treatment of its bond portfolio because of lower interest rates, a change to the valuation of its derivatives portfolio and a charge related to the tightening of its credit spreads.

The North Carolina-based bank cut expenses by $3.1bn in the quarter to $14.2bn, as it made redundancies and had a lower litigation burden after it settled some of its morass of legal issues related to crisis-era mortgages. It cut 18,400 staff in the 12 months.

As one of the biggest deposit-taking banks in the US, BofA has been affected by the prolonged low longer-term interest rates.

Its net interest income — which it earns from the difference between the rates it pays depositors and the rates it charges borrowers — fell from $11bn to $9.9bn year-on-year, exacerbated by the accounting adjustment.

Shares in BofA fell 4.4 per cent; shares in Citi fell 3.9 per cent.