We shouldn't make too much of quarterly earnings, but it's a good time to check the latest developments and relook at our investing theses.
As of today, three of the four largest retail banks have reported fourth-quarter earnings. JPMorgan (NYSE: JPM) and Citigroup (NYSE: C) were on the disappointing side, but Wells Fargo (NYSE: WFC) showed strong results.
What you see is the bifurcation of the regular banking business and the investment banking business. JPMorgan, Citi, and Bank of America (NYSE: BAC) (which reports before market open on Thursday) all have hefty regular banking and Wall Street banking divisions, while Wells is the largest pure play regular bank.
So, the good news for Citi is that we've seen better lending numbers for the industry. The bad news is that the investment banking business, including trading and deal-making, has taken a hit.
The general view is that European concerns are stymieing the capital markets. That said, we can always expect volatility from the investment banking business.
And also regarding Europe, the market is wary of the direct European exposure of the largest banks. As we learned from the 2008 financial crisis that took Citi from a market leader to being kicked out of the Dow (INDEX: ^DJI) in 2009, the reported risks and exposures of big banks can't be fully trusted.
But if you're looking for the numbers, the Associated Press reports, "At year's end, Citi held $33.4 billion in debt issued by European countries and loans to businesses in debt-hobbled countries such as Greece, France, Belgium and Ireland."
As I write this, Citi is down more than 5% on an up day for the Dow (up 1% or so). Looking at the bigger picture, the Citigroup earnings haven't changed my general bullishness on banking in general and Citigroup in particular. Bank of America has gotten a lot of the press for being beaten down to well below book value, but Citigroup isn't trading very far above it.
In both cases, we see banks that are critical to the global financial system, banks whose balance sheets are impossible to fully decipher, and banks trading at steep discounts.
After earnings, I remain bullish on Citigroup and think it's a good pickup for experienced banking investors who can handle the very real risks. If you're looking for an easier bank to understand, I'll point you to a smaller bank that has some of the best operational numbers I've ever seen. I detail it in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the small bank I believe Warren Buffett would be interested in if he could still invest in small banks.
