Can Bank of America and Citigroup compete with Goldman?
Filed under: Company News, Earnings
Bank of America (BAC) and Citigroup (C) are reporting earnings this week, but can they compete with Goldman Sachs's (GS) boffo profit boost?
Analysts are not expecting to see B of A and Citi do as well. And, let's face it, they're still wards of the state -- holding onto a combined nearly $400 billion in TARP and other bailout money. Not only that, but their first quarter earnings were overshadowed by non-cash gains related to a change in accounting rules for toxic waste.
Before examining what B of A and Citi are expected to earn for the second quarter, let's look at Goldman's $3.4 billion second quarter profit, which was 48 percent higher than its Q2 2007 profit of $2.3 billion -- the year when it paid its record bonuses. Some analysts are now expecting Goldman to pay a compensation of $773,000 per employee in 2009 -- 17 percent more than the $662,000 it paid in 2007. If Goldman can sustain this profit growth for the second half, it will have earned its money.
How did Goldman do it? Beyond vague references to profits in fixed income, commodity, currency trading and equity issuance -- it's hard to tell. But I wonder whether a detailed description of how Goldman profited on its trading -- beyond putting 33 percent of its capital at risk -- would withstand the light of day. In fact, thanks to Goldman's use of so-called dark pools, its electronic trading, say, to profit from minute millisecond price discrepancies between the S&P 500 index and individual stocks, is hidden through an "immediate or cancel" feature.
Goldman does have a huge advantage over the competition when it comes to people. Goldman hires brilliant team players -- one might think of this as an oxymoron, but it really is the key to Goldman's success. That's because when brilliant people debate, they consistently come up with better answers than a lone superstar.
Meanwhile B of A and Citi both look to post better earnings -- though a far cry from Goldman's. Analysts expect B of A to report a profit of 21 cents a share for the quarter compared with 72 cents a share in the year-ago quarter. And B of A faces a raft of one-time charges, including a special assessment of $900 million from the FDIC; mark-to-market hits on its fair value debt of $2 billion; another mark-to-market expense on its counter-party insurance agreements of $1.5 billion; and further costs associated with its Merrill Lynch acquisition.
Citi revenues and losses are tough to predict. Revenues may range between $22 billion and $24 billion. Its second quarter loss per share could range from a nickel per share to 76 cents per share. Barclays Capital analyst Jason Goldberg thinks Citicorp will be profitable, while Citi Holdings -- the bad bank -- will post an operating loss. The FDIC's special assessment fee could hurt Citigroup's results by 10 cents a share. IStockAnalyst forecasts revenues of $23.33 billion and EPS of 24 cents.
In a nutshell, Goldman sets a record while B of A and Citi continue to stumble.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
7-15-2009 @ 9:06AM
ali said...
Enought with Citicorp being "profitable". Unlike Goldman that has great leadership and management, C depends on the sleight of hand --- how many pieces can we divide the company into, and then report seperate results for each.
SORRY CITI, YOU STILL OWN THE WHOLE MESS.
What has C done to resolve the $ 2 Bil+ of crap assets? -- they have done virtually nothing !!!! With C, it's a waiting game hoping the market will forget and relapse back to the mindset before the meltdown.
Rumor has it that C is trying to "move" as many as the new common shares towards Citi Holdings in order to make Citicorp look better from a shareholder standpoint. Let's hope the government will put a stop to anything even remotely similar to this ENRON-like scheme because we, the shareholder and US taxpayer will be out in the cold for ever !!!!!!!1
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7-15-2009 @ 9:53AM
Dave said...
This is nothing more than another sleight of hand move by the Obama scamsters to manipulate the market in an effort to paint a rosy picture. It is all BS.
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7-15-2009 @ 7:01PM
Richard said...
Ah yes, partisan politics is the corrupt corporate thieves' best friend. These fat cat Wall Street Ponzi scheme lads love the blame game in politics because it takes the heat off of their well-oiled syndicates that have no loyalty to investors regardless of party affiliation.
That's why they give generously to both parties. It's called CYA. While the chattering masses go at each others' throats the fat cats march on to the bank, happy once again that their ill-gotten wealth will never be touched by regulators or oversight.
Besides, the chief Feeding Chairman, Ben Barnanke, had this Potemkin Village economy set up long before the 2008 election. He and his predecessor, Alan Greenspan, deliberately provided cover for the fat cats by keeping the interest rates they can borrow money at less than 1%.
What a deal! It's more free money even without the bailouts. I just looked at my Kohl's monthly bill. Their interest rate is 21.8%. When was the last time ordinary working people ever got 1%? Never!
7-15-2009 @ 11:01AM
jay said...
TOUGH ACT TO FOLLOW ??? GOLDMAN is another BERNIE MADOFF FRAUD ... enitre profit for quater came from USA TAXPAYERS $13 BILLION dollar back door payment from AIG CORP. GOLDMAN CORP is a JOKE. Remember WALL STREET only takes care of WALL STREET, manage your own investments, you do not need to support highly compensated Analysts and CEO FRAUDS. What happened to the $4.2 billion dollar off shore account RAIDED by ex AIG CEO GREENBERG anyway ?
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7-15-2009 @ 11:30AM
Richard said...
I think Goldman Sachs' huge profits, the best in 140 years of the company, is another one of those Duh! moments. Clearly, when you pare down your now defunct competition, Bear Stearns and Lehman Bros., you increase your monopoly and therefore your profit margin. Get rid of your competitors and voila! you make gazillions even in a sour economy.
Think of it as sort of a Wal-Mart loss leader policy where they went into an areas that had several stores they wished to compete with. Wal-Mart lowers their prices on goods, even taking a temporary loss, then when the competition can't match those prices without going bankrupt they simply go out of business completely before being bled dry by behemoth Wal-Mart.
It's no different at Goldman Sachs, only they had it even better. They got the U.S. taxpayers to hand them over bailout money via their alumnus, former Treasury Secretary Henry Paulson, while Bear Stearns and Lehman Brothers were left hanging out to dry. Nice work if you can get it, especially since there were no real risks for Goldman. As they say, "The more things change..."
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7-15-2009 @ 2:02PM
nick said...
The dirty little secret is Goldman gave Obama over a million during the election and millions in bail out money for giving him money, a lot of ex Goldman folks are in bed with Obama, this is how they are making millions with the help of Obama, using our tax payer money.
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