Banks' Quarterly Earnings And Why They Are Misleading (SLIDESHOW)

Banks are reporting shockingly positive earnings in the first quarter. But there is reason to be skeptical that these numbers are more the results of accounting gimmickry than actual profits.

The Huffington Post takes a look at Bank of America, Citigroup, JP Morgan and Wells Fargo, and lays out why their first quarter numbers are better digested with a large dose of salt.

Bank of America posted a profit of $4.2 billion on Monday. But $3 billion of that came from its acquisition of Merrill Lynch, and it was also given a $2.2 billion boost from the repeal of mark to market accounting.

A look deeper inside the earnings shows a number of reasons for concern: credit card losses jumped to 8.62%, up from 5.19% a year ago, and nonperforming assets rose 41% from the end of December to $25.7 billion. It was forced to set aside $13.4 billion for additional credit losses, and it earned just $4.25 billion in net income for the entire quarter.

As for Citigroup, it posted a profit of $1.6 billion, but accounting rules played a starring role. Banks are required to take a gain when the price of their debt falls. While this sounds counterintuitive, it is because when debt declines in value, it is assumed the bank will buy back that debt at the lower price, and retire it. So, because investors have such little faith in Citigroup, the price of its debt has dropped. In an ironic twist, this gave the bank a $2.7 billion boost in revenue.

As for JP Morgan, it posted $2.1 billion in net income this quarter, startling analysts with a strong number. But like the other banks, it was misleading. The increase was almost entirely due to a jump in investment banking from a loss of $7.9 billion to a gain of $2 billion. Revenue in every other category was either flat or down.

This boost is a one-time event. "For JPMorgan to reproduce these results quarter after quarter, it would have to have unprecedented, exceptional, super-duper" banking revenues, James Kwak of RGE Monitor said.

A major drag was credit risk, which is likely to persist. The bank's credit costs surged 97% from a year ago to $10 billion, and it had to add another $4 billion to its loan loss reserves.

Wells Fargo was the first to kick off bank earnings season when it released a three-page press release scant on details, which said the San Francisco-based bank expected to report first quarter income of $3 billion.

To help it achieve this figure, Wells took advantage of a rule that has since been banned, to carry over $7.5 billion in Wachovia loan loss provisions that helped boost its net income. It closed on its acquisition of Wachovia Dec. 31. The rule was banned the following day.

The bank also maintains it has tangible common equity, a measure of bank capital of $36 billion, although Jonathan Weil of Bloomberg puts it at just $13.5 billion.

Lastly, it has taken advantage of the repeal of mark to market accounting. While it won't say what the earnings would have been without the change, Bloomberg puts its losses on securities, which don't have to be reported under the mark to market changes, of $4.2 billion.

• • • • • Banks are reporting shockingly positive earnings in the first quarter. But there is a skepticism that these numbers are more accounting gimmickry than actual profits. The Huffington Post takes a look at Bank of America, Citigroup, JP Morgan and Wells Fargo, and why their first quarter numbers are better digested with a large dose of salt.

Comments

[PhilipTaylor]

07:24 AM on 04/29/2009

These Executives and Employees have taken so much of the Profits from their banks the Banks are Bankrupt!

These people who in 1980 made 20 times the average worker NOW MAKE 400 Times the Avg Worker!

Remember $10 to $100 Million Christmas Bonuses on top of $10 to $50 Million salaries!

They ruined their OWN Banks and want to continue while WE the taxpayers Bail their Banks OUT!

THEY RUINED THEIR OWN BANKS!

[Hailmaryyy]

09:53 PM on 04/22/2009

How can the banks possibly have these types of profits in the face of a depression? We all know loan losses will be rising in the future as unemployment continues to rise. Why do we have accounting rules that allow a write-up when your own bonds trade lower in the market-place?

http://www.escapethenewgreatdepression.com/

What we need is a recognition of how serious our problems are and the enormity of what it will take to help the country survive the economic tsunamai we face.

[research]

06:53 PM on 04/21/2009

"But there is reason to be skeptical that these numbers are more the results of accounting gimmickry than actual profits. "

Duh! Why do you think FDR called them Banksters?

[mjtaylor22]

05:11 PM on 04/21/2009

do you guys remember that arthur anderson is now accenture.
accountign gone wild.
ha ha ah a

[mjtaylor22]

05:04 PM on 04/21/2009

pls understand that everyone does not have steady income, I have faced two lay offs in8 years, this is crazy to me, imagine if this 2nd lay off had gotten me like the first one in the merger of Wachovia securities and prudential securities had , I would be completely dead financially instead of on life support, also my income has stagnated at 2003 levels actually below those levels, bonus potential is null and void form thousands in any given month to a semi annual potential bonus of maybe 500.00 if you play nice.

I personally do not have credit card debt, but that is because after that last lay off, I went to cash only system, do not even have a card now, but I will not judge those who use credit, some have abused it ignorantly some un intentionally, and other have been hoodwinked by the card co's .

to many factors to viable place blame squarely on the debt holders at least in my mind.

[JXJASON]

07:30 AM on 04/21/2009

It really amazes me that a lot of Americans have credit card debt.

Just pay the bills on time. Then there is no late fee and no interest payments.

It is bad management of your financial affairs to have too much debt.

[nowpolitics]

08:55 AM on 04/21/2009

Of course, I am not positing that being in debt is a good. The country has gone to wrong path with institution of easy credit, no savings culture and false air of immediate gratification. Easy credit should be stopped. When some pundits point to the fact that lending has continued dwindling in the banks as a sign that we are not recovering from the economy, that is a doublespeak. Easy credit got us here to begin with, to get out, it needs to be nipped in the bud.

Normally I will not reply to a disingenious comment as you have made here but with an evidence from your earlier post, I am going to take a bite.

"I started to read this article. Half way down, I stopped. Here is why. Not everyone is in debt. I, for example, have no debt. All my debts were paid off over the past 25 years. I managed to pay off as much debt as possible as quickly as possible. I am now retired and I am not wealthy."

Congrats, you have made it to the debt free line. Do not disparage others, it is highly hypocritical.

[dc2nm]

02:04 PM on 04/21/2009

Before this crisis, too many Americans were crushed by the rising gas and energy costs. I know too many people that needed to put necessities like food and gas on credit cards just to feed their families and get to work. Not the best strategy, but when a family has nothing left to cut, they do what they can and hope things turn around.

[sonofsamphm1c]

05:39 PM on 04/21/2009

Long before high gas prices, like way back when gasoline was about as cheap as tap water, credit-card companies were attempting to extend credit to family pets.

What we really have done is extend credit in lieu of wage increases as a means of creating economic growth. This cannot be fixed in the blink of an eye.

[PlayTOE]

05:19 AM on 04/21/2009

credit card losses jumped to 8.62%, up from 5.19% a year ago

This may have had something to do with the fact that they increased card rates to the point that people could not afford to use the cards, and could not afford to pay off the exorbitant fees they scammed customers with.
When noticing that these were the same people who as taxpayers had just bailed them out ... the banks attitude is sick sick sick.

[Viper]

03:23 AM on 04/21/2009

Reason for selloff on Wallstreet.. or a reason.


From the Turner Radio network.. which has not existed for years.. just arian nation blog site. Part of the stress test they say they got and published. treasury says its not. Pointed to one bank, not part of the 19 in their stolen leaked report.

"The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse."

So our 19 major banks plus another 2000 plus banks only have 4.67 trillion in assets.... Hmmmm. So Citi and JP Morgan are almost 50% of our banking system on their own...

THE SEC has descended on Hal Turner since this report which is said to be false and caused a massive sell off... and who knew he would be releasing this... so they could short?


If this is correct we can kiss this country could bye... there is no action that will not prevent a greatest depression... get your canned goods now.

Regards

[DrRoberts99]

12:30 AM on 04/21/2009

From the Santa Rosa Press Democrat......Wells Fargo made significant donations to Sonoma County non-profit groups and schools in 2008.
The financial services company contributed to Hospice of Petaluma, Sonoma State University, Salvation Army, Santa Rosa Memorial Hospital Foundation, American Heart Association, Wells Fargo Center for the Arts and Emergency Services Foundation.
"We're proud to support organizations that work to strengthen our communities," said Greg Morgan, regional president for Wells Fargo's Sonoma County operations.
In addition to corporate giving, in 2008 Northern California Region Wells Fargo employees tallied 20,000 hours volunteering at non-profit agencies in their communities.

Oh, I'm sorry. I interrupted the 24/7 bitch session on banks.

[shivadas]

01:29 PM on 04/21/2009

What the heck does that have to do with misleading quarterly earnings? It's great that you are proud of your employer's largess in some instances, but banks brought us to this problem point and continue to deceive, including and especially Wells Fargo.

[sonofsamphm1c]

05:14 PM on 04/21/2009

Okay, so you are saying that if a business sells off a business segment and makes a gain,a big profit, it should not include it in income?

You're advocating income-tax evasion and hiding profits from creditors as being more transparent? Seriously?

Read the financials. They explain every single detail, and then they get accused of deception when people read those details in their financials? LMAO.

[freezecreditcardrates]

11:51 PM on 04/20/2009

The banks are trying to cover their write offs by boosting credit card rates and fees. They know that the rates will be highly regulated by 2010, but they will try to rack up billions of dollars of excess profits in the meantime. We need to write our Representatives and Senators before the 19 large issuers meet with President Obama on 4/23.

http://freezecreditcardrates.blogspot.com/

[vagabondvet]

12:29 AM on 04/21/2009

Banks are trying to cover their losses from write-offs by increasing rates to make up for losses from write-offs. You do understand basic business and accounting, I presume?

[vinny]

12:51 AM on 04/21/2009

would this situation have been possible under glass-steagel?

[LunaPark]

11:42 PM on 04/20/2009

Open secrets . org shows Max Bacus (D), chairs the Senate Finance Committee and Chris Dodd (D) chairs the Senate's banking committee, were the recipients of the largest AIG lobbyist payouts. Please vote third party next election.

[Viper]

03:12 AM on 04/21/2009

AIG is headquartered in TODDs state... a major employer. His state is the home of most insurance companies...

So its not surprising he would get lots of donations from lots of AIG employees.

Regards

[mjtaylor22]

05:09 PM on 04/21/2009

third party candidates do nto win in this nation just yet, and that vote takes away from the party that will at least try to fix this mess.
so only vote thrid party if you are normally voting republican ha

[HatingTheGame]

10:05 PM on 04/20/2009

Figures never lie, but am thinking these liars are figuring big time -- figuring out how to jack the system and keep taking out money.

[doneflyin]

11:38 PM on 04/20/2009

Figures never lie.The problem is liars figure.
If they are doing so great, why are their stocks being dumped?

[themodernleader]

09:31 PM on 04/20/2009

Sonofsam... I am corrected. I got my marks mixed up. Sorry about that.

[elsellel]

09:16 PM on 04/20/2009

the entire banking scenario in the 21st century, with fractional reserve practices, usury interest rates and overdraft charges, corporate philosophy towards customers, i.e., we don't care - it's about the bottom line, go crawl under the rock you came from... it's all ugly and it's all a scam. cooking of the books... cooking of the books.

[take10]

08:59 PM on 04/20/2009

That's great! Let them feel like the rest of us who are being gouged with high interest rates.