Goldman, Citi Earnings Reports Mixed
Wall Street's road to recovery may not be as smooth as it seems, with Citigroup and Goldman Sachs presenting decidedly mixed earnings reports Thursday.
The Dow Jones industrial average Wednesday for the first time in more than a year and the Wall Street Journal reported that compensation at financial firms had returned to pre-crisis levels.
But Citigroup provided a sobering reminder that the economy is still struggling, reporting that its third quarter results were weighed down by billions of dollars in failed loans.
The bank reported a $101 million profit before accounting for $288 million in preferred stock dividends and the debt exchange offer that give the government a 34 percent stake in the bank. The exchange offer, which gave Citigroup a better mix of capital to withstand additional loan losses and further weakening in the economy, took earnings down $3.06 billion.
Including those items, the New York-based bank reported a $3.24 billion loss.
Investors reacted negatively to the report, sending Citi shares down 33 cents, or 6.6 percent, to $4.67 in afternoon trading.
Goldman's third-quarter earnings rose 73 percent from the depths of the financial crisis as income from the company's trading operations offset a drop in its investment banking business.
But Goldman's stock fell 2.4 percent Thursday afternoon as investors reacted to the slide in investment banking revenue, the result of a general slowness in takeover activity. Goldman also had $5.35 billion in compensation expenses during the July-September period.
Shares were trading at $187.66 before the market's open after closing Wednesday at $192.28.
Overall, investors Thursday after reaching the 10,000 point benchmark.
Goldman earned $3.03 billion, or $5.25 per share, easily beating analysts' expectations for a profit of $4.24 per share. The bank earned $810 million, or $1.81 per share during its fiscal third quarter last year, which ended in August. During the peak of the credit crisis last fall, Goldman became a bank holding company and changed to calendar quarterly reporting periods.
The company said fixed income, commodities and currency trading buoyed its profits for the second straight quarter.
Investment banking revenue, traditionally the foundation of the company's business, fell to $899 million in the third quarter. The results were 31 percent worse than similar quarter last year as the credit crisis was worsening and 38 percent worse than the most recent quarter.
Goldman attributed the drop to a decline in bond underwriting as the still troubled credit markets limited the amount that companies could borrow to complete deals. The investment banking business would have fared even worse were it not for strong stock underwriting activity. As the stock market has rebounded, Goldman was able to leverage its strong reputation to help companies issue new shares to take advantage of the rising market.
Lloyd Blankfein, the company's chairman and CEO, said Goldman is starting to see a rebound across many of its businesses even as the broader economy and consumers continue to struggle with rising unemployment and mounting loan losses.
"Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors," Blankfein said in a statement.
Goldman, which has outperformed other financial companies for years, has been the strongest bank throughout the financial crisis. It had less exposure to toxic mortgage-backed securities than other companies and also has been more aggressive in its trading.
As an investment bank, its exposure to traditional consumer loans, like mortgages and credit cards, that have plagued traditional banks like Citigroup Inc. and Bank of America Corp., is limited.
Citigroup said its loan losses during the quarter came to $8 billion, down $386 million from nearly $8.4 billion in the second quarter. But it offered a sign that many consumers continue to be overwhelmed. Foreclosures from summer to fall.
Banks including Citigroup had warned when second-quarter earnings were released that loan losses would continue into next year.
Citigroup said it added $800 million to its loan loss reserves during the third quarter, down $3.1 billion from the addition it made during the second quarter.
Citigroup, like other national banks, has seen more customers stop repaying loans as the economy falters and unemployment rises. Credit card defaults and mortgage losses are likely to continue to climb. Losses on credit cards typically mirror unemployment, which rose to 9.8 percent in September.
Economists predict the jobless rate will pass 10 percent in the coming months, though the Labor Department reported Thursday that new jobless claims to 514,000 from 524,000 a week ago - the fifth decline in six weeks.
JPMorgan Chase & Co., which reported quarterly results Wednesday, also struggled with rising loan losses, particularly in its home and credit card loan portfolios. However, its strong investment banking division more than offset the troublesome loans, helping JPMorgan earn $3.59 billion during the quarter.