Big gains from investment banking and other market-related businesses propelled third-quarter profits to double-digit gains at the biggest U.S. banking companies to report on Tuesday, but credit quality continued to sound alarm bells.
Citigroup said profits rose 27%, to $3.09 billion, on solid gains from corporate and investment banking and consumer operations. Earnings per share of 67 cents beat the consensus estimate of Wall Street analysts by 2 cents.
Wells Fargo & Co. in San Francisco said profits rose 11%, to just over $1 billion, and met analysts' earnings-per-share expectations of 64 cents. Profits at FleetBoston Financial Group jumped 10%, to $782 million, and were also in line with the consensus. Both companies reported gains from investment activities.
FleetBoston announced plans to acquire Summit Bancorp of Princeton, N.J., earlier this month. Summit said its third-quarter profits rose 43%, to $133.5 million, boosted by strong consumer and commercial loans and growth in fee-based products.
In the minus column was Bank One Corp., which is continuing to show the effects of a massive restructuring undertaken earlier this year. The Chicago company said profits fell 37%, to $581 million, or 50 cents a share, which met expectations. Bank One also reported a sixfold rise in nonperforming assets for the period.
Diane Glossman, an analyst at UBS Warburg, said rising nonperforming assets at most of the banks to report so far was cause for concern, but probably not need for panic. "They are not so high as to throw into question the banks' ability to generate earnings," she said. "But it's totally a legit concern."
Total revenues rose 15%, to $16.8 billion, fueled mostly by revenue gains from investment banking and other corporate banking activities.
Revenues from Citi's global corporate and investment bank rose 26%, to $8.1 billion, and profits from the group rose 40%, to $1.6 billion. Profits from Salomon Smith Barney rose 44% over last year, to $622 million, on revenues from mergers and acquisitions advisory. Profits from corporate finance activities, including underwriting and trading, rose 27%, to $883 million.
Revenues from private banking and investment management rose 22%, to $828 million, and profits rose 14%, to $176 million.
Revenues from consumer banking rose 5%, to $7.5 billion, and profits rose 17%, to $1.3 billion. Income from credit cards rose 32%, to $476 million, and credit card receivables were $95.6 billion.
Citi had a decline in revenues from venture capital and other equity investments, down 68% over last year to $92 million. But sales of debt securities more than offset that. Total revenues from investment activities rose 59%, to $495 million.
Nonperforming assets declined 1.7%, to $4.35 billion, according to the calculations of Ms. Glossman.
Sanford I. Weill, chairman and chief executive officer of the $805 billion-asset company, said in a statement that Citigroup would "continue to invest our substantial capital to expand our leadership in key areas, enhance our long-term growth, and build our base of stable recurring earnings."
In September, the company announced plans to acquire Irving, Tex.-based Associates First Capital Corp. in a $30 billion transaction that will make it the largest U.S. consumer finance operation and substantially boost its presence in that business overseas, particularly in Japan.
"Although we are comfortable that we are making progress on initiatives announced in July, our earnings level is still not acceptable," said James Dimon, chairman and chief executive officer, in a statement. "Increases in nonperforming loans, particularly in our commercial portfolio, warrant our continued attention."
Nonperforming assets jumped to $2.1 billion from $352 million at the end of June, reflecting a deterioration in the company's commercial loan portfolio, including loans to health care-related companies and acquisition finance transactions, the company said. Chargeoffs were $1.09 billion, or 1.86% of average managed loans, down from $1.15 billion, or 1.99% of managed loans in the second quarter.
Mr. Dimon said during a conference call with analysts that he expects results in the fourth quarter to be around 50 cents a share, indicating continued provisioning for loan losses and negative results in the company's automobile leasing portfolio. The company said it projects 2001 earnings per share of $2.86 to $2.99.
Profits from retail banking fell 6.3% in the third quarter compared to last year, to $251 million, but were up from a loss in the second quarter, driven by wider spreads on loans and deposits, the company said. Loan growth in products such as home equity was offset by a $58 million loss in automobile lease residuals, the company said. Profits from commercial banking fell 13%, to $172 million. Large corporate and middle-market loans grew 12% and 11%, respectively.
First USA Inc., the company's Wilmington, Del., credit card unit, said income fell 39% over last year, to $177 million. Managed receivables were $65.9 billion, down 5% from last year and flat with the second quarter.
Excluding $59 million of after-tax gains from the sale of $5 billion of branch deposits during the quarter, earnings per share of 84 cents met expectations.
Fee income, including gains from the divestitures, rose 27% from the same period last year, to $2.15 billion. Though revenues from capital markets slowed from the second-quarter pace, they rose 59% from the year earlier, to $749 million.
Income from international activities rose 19%, to $106 million. "The Brazilian economy had a bit of a rebound, and we benefited from that," said Eugene M. McQuade, chief financial officer at Fleet.
Profits at Quick & Reilly, the company's discount brokerage arm, rose 15% from the third quarter last year, to $45 million. Profits from equity investing rose 177%, to $108 million. Robertson Stephens' profits increased by a whopping 207%, to $43 million.
"The company has put forward a strategy of diversified revenue growth, and it came through with flying colors," said Gerard Cassidy, an analyst at Tucker Anthony Cleary Gull.
Nonperforming assets grew 8% from the second quarter, to $1 billion, about on target with analysts' expectations. Mr. McQuade said that nonperforming assets are likely to increase into the middle of next year.
Compared with other large banking companies, "they seem to be ahead on this process in terms of recognizing weaker credits," said Catherine Murray, an analyst at J.P. Morgan Securities.
Steady internal loan growth and portfolio gains through recent acquisitions, such as National Bancorp of Alaska, helped boost net interest income, even as the net interest margin fell to 5.46%, from 5.74% a year earlier.
Not including provisions for loan losses, net interest income rose 8% from the third quarter last year, to $2.59 billion. Fees rose 21%, to $2.19 billion, fueled by venture capital gains of 230%, to $535 million.
But higher levels of service charges, credit card fees, and profits from other fee-income businesses also contributed to the rise in noninterest income.
As it has in past quarters, the company used gains from its venture capital and private equity investing to offset a variety of expenses, such as net losses of $177 million as it reorganizes its securities portfolio.
Richard Kovacevich, Wells' chief executive officer, said that despite more than $600 million of unexpected expenses since its acquisition by Norwest Corp. was announced, the company would meet its per-share cash earnings target of $2.91 for the year. Expenses rose 11%, to $2.69 billion, from higher spending on Internet initiatives and conversion costs from previous acquisitions.
Earnings per share of 76 cents met analysts' consensus.
On Oct. 1 Fleet said it would buy Summit, New Jersey's largest commercial banking company, for $7 billion of stock. Fleet said Summit, with a strong base of middle-market clients, would help the company keep a balance in its business mix and avoid the volatility that could come with tilting too heavily toward commercial, investment, or retail banking. The transaction is expected to close March 31.
Summit, with $39.5 billion of assets, said its commercial loans rose 19%, to $9.7 billion, and consumer loans grew 16.6%, to $7 billion. Deposits rose 9.4%, to $26.6 billion. Revenues from fees were up 12.7%, to $118 million. The net interest margin narrowed slightly, to 3.70%, from 3.86%. Expenses rose 11.8%, to $236.9 million.
Analysts said the blemish on Summit's quarter was the increase in nonperforming assets, up 20.4% from the second quarter, to $143.4 million, or 0.56% of the company's loans and real estate owned.
"It's discomforting that they went up 19%, but we do have to keep in mind that 56 basis points - that's incredibly low," Mr. Cassidy said.
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