Updated from 9:28 a.m. EDT
The cash machines were working overtime in the second quarter at
Bank of America
, as the two big banks posted sharply higher profits that easily exceeded Wall Street expectations. Citigroup also boosted its dividend 75%.
Profits from continuing operations rose 12% at Citigroup, and rose 23% at BofA. Results at both banks were driven by their big consumer lending and credit card divisions. Citigroup, in a real show of strength, even eked out a small profit from its investment banking division.
Citigroup, the nation's largest financial services firm, earned $4.3 billion, or 83 cents a share, in the quarter, compared with $3.83 billion, or 73 cents last year. (Last year's number excludes income related to the spinoff of its former
Travelers Property Casualty
The Thomson First Call estimate for Citigroup was 79 cents a share.
Citi also approved a 75% increase in its quarterly dividend, to 35 cents from 20 cents. The move follows a 25% dividend increase a few weeks ago from BofA. In a conference call, Citigroup Chief Financial Officer Todd Thomson said the dividend increase would now place the bank's payout ratio somewhere in the middle range for most U.S. banks. The yield comes out to around 2.9%.
BofA, the nation's third-largest bank, reported $2.74 billion in second-quarter profits, or $1.80 per share, up from $2.22 billion, or $1.40. The Charlotte-based bank easily beat the First Call consensus estimate of $1.57 a share.
In a corporate governance move, Citigroup announced it would follow
lead in moving away from the awarding of stock options, and will instead use restricted stock as its main equity-based method of compensating its employees. Citigroup had previously said it would begin to treat stock options as an expense on its income statement.
The earnings news from Citigroup and BofA helped fuel a strong rally in financial stocks on Monday, with the Philadelphia BKW Bank Index rising 2.9% in midday trading. Shares of Citigroup rose $1.42, or 3%, to $47.57, while BofA climbed $1.84, or 2.2%, to $84.72.
For the most part, there would appear to be little ammunition for bears in the earnings reports of both banks, especially when it comes to the results of their consumer operations. Credit card income at BofA, for instance, increased 23% to $762 million. Citigroup's worldwide consumer lending operation, meanwhile, posted an 18% gain in net income to $2.3 billion.
The only chink in Citigroup's armor in the quarter was the poor performance of its Japanese banking operation, which recorded a 24% decline in net income to $204 million. Meanwhile, BofA's main weakness was its investment bank, which earned $440 million, a decline of 14% from a year ago.
In a conference call, James Hances, BofA's chief financial officer, said "credit quality seems to be stabilizing," as the dollar value of bad loans and assets charged off by the bank in the second quarter declined 7% from the first quarter.
Last year, the main drag on earnings at big commercial banks was a sharp rise in bad corporate loans to the telecom and energy sectors.
The strong performances of the banks' consumer divisions were not a surprise. Citigroup, BofA and other banks have relied on the consumer to overcome the recession and lack of demand from corporate borrowers.
What was unexpected was the strong performance of Citigroup's investment banking operation, especially coming off a year in which it became the poster child for bad Wall Street behavior. It appears the scandals have not done any lasting damage to Citigroup and the bank's ability to attract corporate clients.
Citigroup's investment bank, formerly known as Salomon Smith Barney, earned $1.34 billion in the quarter, a 2% gain. The bank was a big beneficiary of the surge in corporate bond underwriting this year. Its revenue from debt underwriting rose 41% to $507 million.
Outside of the Japan, the only other potential worrisome sign in Citigroup's report is the slight rise in the amount of money the bank set aside in a reserve account to cover bad loans and other losses. Its allowance for credit losses at the end of the quarter rose to $11.57 billion from $11.45 billion in the first quarter. That could be an indication Citigroup hasn't yet seen the peak in bad loans in its portfolio.
But the rise in the bad-loan reserves didn't stop Citigroup from socking away more cash on it balance sheet, something that could be used to make acquisitions later this year. At quarter's end it had $21.8 billion in cash, up 10% from the first quarter.
Citigroup executives have made no secret of their interest in buying a bank with a strong asset management division and regional banking operation. Sources say the bank also is interested in the credit card business
is trying to sell.
When asked about possible acquisitions during the conference call, Thomson said the bank "loves the credit card business." But Thomson did not identify any potential acquisition targets.