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.