MarketLine Blog

Bank of America and Citigroup: Poor Q4 results see share prices fall sharply

Yesterday (January 15), Bank of America (BoA) and Citigroup announced underwhelming results for Q4 2014 that seemingly caught the market off guard and caused share prices in both banks to fall.

Bank of America announced Q4 revenues of $18,955m, down 12.7% on the same period a year earlier. Net income also fell from $3,439m in Q4 2013 to $3,050m, a drop of 11.3%. This has impacted preliminary 2014 full year results as revenue has fallen 5.2% on a year-on-year basis, and net income by a staggering 57.7%.

Citigroup’s results did not make for better reading, as its Q4 revenue of $17,805 represented a 1% fall on the same period in 2013. More alarmingly, net income plummeted 87% to $346m.

The common denominator in the banks’ woes is legal costs. In an increasingly litigious banking environment, such banking giants are having to accept large fines for various infringements, most notably mis-selling and non-compliance and BoA and Citigroup are far from immune.

The former’s performance in 2014 was undoubtedly impacted by a record $16.7bn settlement with the US Department of Justice for knowingly selling flawed mortgage securities prior to the 2008/2009 banking crisis. Most of the bill was settled in 2014 and the bank has pinned much of its disappointing performance on this.

While Citigroup has not had to contend with any such enormous legal bill, it has had to settle a number of smaller cases, several of which relate to the actions and advice given by analysts, and their impact has also been felt. However, in the case of Citigroup, the major reason for the falls in the metrics outlined above is restructuring. The bank has undertaken an overhaul of its operations which has seen it cease commercial banking in 11 countries. Such restructuring saw the bank incur $3,506m in legal and restructuring costs in Q4 2014.

The underwhelming results announced yesterday hit share prices hard. BoA closed January 14 at $16.04 but closed at $15.20 the following day, a fall of 5.2%. Citigroup’s shares fell by 3.7% over the same period showing that the markets had expected better and the question must now be whether one-off costs really were to blame or whether there are more fundamental issues at play.

Time will tell, but it is difficult to imagine that legal cases and the associated costs are set to disappear overnight, as the banking industry lurches from one crisis to the next. It may be sometime yet before major banks are able to satisfy investor expectation.

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