The Great Bank Earnings That Really Weren't

Bank of America (NYSE: BAC  ) announced surprise quarterly earnings this morning of $3.2 billion, or $0.33 per common share after stripping out preferred dividends. That's good and all -- the bank hasn't had the best of years, you know.

Many are touting B of A's earnings as a sure sign that things have turned a corner. I wanted to be one of them. I crossed my fingers and vowed to stay positive. When the results first came out, I was hoping I could at long last say something upbeat about the bank.

But not today. "Earnings," you have to remember, can be a curiously hazy number.

Behind the seemingly solid news is this little nugget in B of A's press release:

[T]he increase was driven by a $5.3 billion pretax gain on the sale of [China Construction Bank] shares … Noninterest income in the period also included a $3.8 billion pretax gain from the completed sale of the merchant processing business to a joint venture. 

Ah … so moving things right along were $9.1 billion in gains from selling assets in order to raise much-needed capital. That's kinda important to note when you're talking about a $3.2 billion profit.

These are one-time gains that don't reflect earnings power and, more importantly, reduce future earnings power as promising assets are shed. Without these sales -- looking at the company on a normalized basis -- B of A surely would have been deep in the red. Some might find that intriguing.

Not so pretty in the Citi
Now we move on over to Citigroup (NYSE: C  ) . Its quarterly earnings also made eye-popping headlines this morning. "Citigroup delivers surprise $4.3 billion profit" said one media outlet.

A $4.3 billion profit? Citigroup? Really?                            

No, not really. And that's what's sad. Citi's $4.3 billion "profit" was entirely made up of selling most of its Smith Barney unit to Morgan Stanley (NYSE: MS  ) , which generated a pre-tax gain of $11.1 billion.

Never mind that this is obviously a nonrecurring gain. Never mind that without the sale, Citi would have reported a gigantic loss. Oh, and never mind that Smith Barney was one of Citi's only consistently stable sources of earnings. People see green, and they get fired up. That's the life of an investment community whose outlook is firmly locked in a 90-day timeframe.

I've noted that Goldman Sachs's (NYSE: GS  ) and JPMorgan Chase's (NYSE: JPM  ) recent earnings, while impressive, might end up being one-off events. But at least they're actually earning the money. They have earnings power -- it just might not be wholly sustainable. For Bank of America and Citigroup, the quest to find true earnings power is still quite elusive.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (64)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 17, 2009, at 1:44 PM, plange01 wrote:

    GE looks terrible they should walk immelt out today.no severence pay no nothing.. citibank and bac doing a little better...they have turned the corner and are at least out of trouble.....

  • Report this Comment On July 17, 2009, at 1:58 PM, silverminer wrote:

    And then there was the conference call, where BAC reportedly called the Countrywide and Merrill acquisitions accretive.

    ACCRETIVE? Really?

    Here's my rant about it. :)

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=229884&t=0...

  • Report this Comment On July 17, 2009, at 4:39 PM, JibJabs wrote:

    Good article - thanks.

  • Report this Comment On July 17, 2009, at 7:09 PM, memoandstitch wrote:

    I stopped looking at BAC and C a few months ago because of the impossibility to predict their earnings. Surprises are bad whether it's a gain or a loss. They show that you have no idea about the business and are gambling rather than investing.

  • Report this Comment On July 18, 2009, at 1:24 PM, jrj90620 wrote:

    You didn't even mention the phony,super low interest rates engineered by Bernanke and the Fed so banks benefit while customers receive lower than inflation rates of interest on deposits.Not very nice.

  • Report this Comment On July 18, 2009, at 1:28 PM, jrj90620 wrote:

    These financial companies assets are just paper backed by fiat Dollars.Eventually,the U.S. Dollar will crash due to it's being backed only by a bankrupt govt and the value of these banks assets will take a major decline.Better to invest in companies holding real assets.

  • Report this Comment On July 18, 2009, at 1:59 PM, TMFHousel wrote:

    "You didn't even mention the phony,super low interest rates engineered by Bernanke and the Fed so banks benefit while customers receive lower than inflation rates of interest on deposits."

    Another way to phrase this is, "You didn't even mention that monetary policy works."

    Thanks for stopping by,

    Morgan

  • Report this Comment On July 19, 2009, at 1:37 PM, plange01 wrote:

    15 months of recession and now close to 7 more in a depression.REAL unemployment is near 20%.1,500,000 forclosures so far this year.rising energy prices,inflation and bankruptcys,these are the facts and there is one more its going to get a lot worse over the next few years.....

  • Report this Comment On July 19, 2009, at 3:27 PM, plange01 wrote:

    citi and bac did fair for the quarter and if nothing else bought themselves more time to improve.as for their stocks bac has had a nice run and should move up to $15 range.citi at this point is worth about $6-8.at least it looks like both will survive

  • Report this Comment On July 23, 2009, at 12:59 AM, kamuirei wrote:

    This time last year ~50% of the most recent college grads had jobs. This year it's around 20%... My generation is getting screwed.

  • Report this Comment On July 24, 2009, at 12:26 PM, slpmn wrote:

    I think jrj90620's point was worth a little more than a snotty dismisal. I wasn't aware its common knowledge that monetary policy is meant to prop up bank earnings. If the idea is giving borrowers low interest rates so they go out and buy stuff - great. Problem is, that's not happening. Lenders are tight and borrowers (businesses and consumers) are in thrifty mode. Right now banks are able to fund their balance sheets and operations at an artificially low cost. Its not a secret, but its still worth noting when talking about bank earnings looking rosier than they really are.

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