Citigroup, other banks beat earnings expectations

Citigroup posted a loss of $966 million, but that was its best quarter in nearly two years.

Chip East/Reuters
Dennis Maguire of Goldman Sachs works on the floor of the New York Stock Exchange. In its earnings report for the first quarter of 2009, Goldman Sachs said it earned $1.8 billion.

Three of America’s biggest banks have reported better-than-expected performance for the first quarter of 2009 – a welcome bit of good news for a beleaguered industry.

On Friday, Citigroup posted a loss of $966 million, but that was its best quarter in nearly two years. In reports earlier in the week, JPMorgan Chase turned in a $2.1 billion profit, and Goldman Sachs earned $1.8 billion. Though it’s not a bank, the trend was paralleled at General Electric, where the large finance division surprised forecasters Friday with $1.1 billion in profits.

All this doesn’t mean that the banking business is moving out from under the cloud of recession. Borrower defaults are still rising, with challenges not only from home loans but also from credit cards and commercial real estate.

But the latest news shows that other forces are helping to provide some shelter from the economic storm. The Federal Reserve, by maintaining rock-bottom borrowing costs for banks, is helping the banks earn wider profits on their good loans.

But banks are also helping themselves, such as by cutting staff and dividends to reduce costs.

“We’ve clearly made substantial progress on many fronts,” said Ned Kelly, chief financial officer of Citigroup, in a conference call Friday with financial analysts. But “the environment continues to be challenging.”

He spoke for the whole industry when he said that performance for the rest of the year will depend on conditions in the wider economy and financial markets.

A big risk for banks is that unemployment continues to rise – a key driver of defaults in credit cards and mortgages. Another risk is uncertainty about where real estate prices settle out. Already, the decline in home prices has exposed banks to steep losses when they resell foreclosed homes. If home prices fall further, it could lead more borrowers to default and boost the losses banks incur on each default.

“A lot of the [earnings] announcements so far are pretty preliminary,” says Peter Nigro, a finance expert at Bryant University in Smithfield, R.I.

Given all the uncertainties, he says, banks may not be setting aside enough reserves to cover future losses in their loan portfolio. If so, today’s upside surprises could be followed by crimped performance in the future.

The reports on bank earnings come at a key time, as the Obama administration prepares to release its own assessment of the health of the largest banks. That so-called stress test could determine whether banks are asked to raise more capital.

Having enough capital is vital, not just as a cushion against potential losses, but also to retain the capacity to lend. A major contraction in the supply of bank credit, President Obama has warned, could choke off an economic recovery before it can even get started.

At the same time, some banks are trying to make the case that they are healthy enough to pay back so-called bailout money from the government. Goldman Sachs, in particular, is maneuvering to pay back $10 billion that came from the Treasury’s Troubled Asset Relief Program (TARP).

While intended to help banks remain healthy, the TARP money has become a stigma for banks in recent months as financial bailouts have become a source of controversy – complete with federal oversight of executive pay.

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