Bullish banks raise recovery hopes

It could have been another week from hell on Wall St, as three of the biggest banks still standing delivered their first-quarter results. But all three pulled out better than expected numbers, lifting spirits on the battered equity markets.

On Friday in New York (Saturday NZT) Citigroup reported a $1.59 billion profit for the first quarter on trading gains and an accounting benefit for companies in distress. Revenue roughly doubled to US$24.79 billion.

The third-largest US bank - bailed out with US$45 billion ($79.98 billion) of taxpayer money - joined Goldman Sachs and JPMorgan Chase in signalling that massive Government efforts to jump-start the ailing economy are helping to boost bank earnings.

"The bulk of the writedown in Citigroup's toxic assets are probably behind them," said investment manager Marshall Front. "But there are obviously huge hurdles ahead with respect to the credit cycle that will provide strong headwinds."

Citigroup said an accounting benefit for distressed companies, cost-cutting and improved trading results had offset red ink from consumer lending and credit cards. "Perhaps the banking sector crisis is bottoming," said Richard Hunter, head of US equities at Hargreaves Landsdown in London. JPMorgan recorded US$638 million of gains from widening of its credit spreads in the first quarter. Goldman Sachs' profit of US$1.7 billion exceeded the most optimistic Wall St estimates. Bank of America, due to post quarterly results early tomorrow morning (NZT), climbed 2.5 per cent in trading on Friday.

The optimism around the banking sector saw Wall St end positive for the sixth consecutive week. The Dow Jones Industrial Average edged up 5.90 points (0.07 per cent) to close at 8131.33, notching the highest close for the blue-chip index in more than two months. The Nasdaq added 2.63 points (0.16 per cent) to a five-month high of 1673.07 while the Standard & Poor's 500 increased 4.30 points (0.50 per cent) to 869.60, its best finish since February 9.

But Citigroup did sound a note of warning with its result. Consumer banking lost US$1.23 billion, reflecting residential real estate losses. Credit card operations lost money in North America and saw overall profit fall by two-thirds to US$417 million. Credit costs rose 76 per cent to US$10.3 billion, including US$7.3 billion of net credit losses and a US$2.7 billion increase to reserves. Its results included a US$2.5 billion gain from an accounting rule that allows a company to record a benefit when the market's view of its creditworthiness declines.

The rule assumes that the company could close out some liabilities at a discount to their value on the company's books, creating a profit. That's prompted some analysts to question whether the bank's revival is sustainable.

"The challenges are still enormous," said Michael Holland in New York.

"In the context of what we heard from JPMorgan yesterday with its continuing concerns about the consumer, Citi is going to suffer too."