Banking sector delivers more earnings in hopeful sign

NEW YORK: The US banking industry delivered more positive earnings surprises Thursday, as Goldman Sachs and Citigroup posted strong results in signs of a rebound in the troubled sector critical to economic recovery.

Citigroup topped expectations, posting a third-quarter profit of 101 million dollars.

Because of special dividends required from a massive government bailout, the results amounted to a loss for shareholders of 27 cents per share. But that was better than an expected loss of 38 cents per share.

Citigroup -- which has received some 45 billion dollars in capital from the US Treasury to shore up its finances, some of which has been converted to common stock -- said the environment remains difficult.

"We continue to execute steadily against our plan, and sustainable profitability remains our primary goal in the near term," said Citi chief executive Vikram Pandit.

"While consumer credit trends are improving in international markets, the US consumer credit environment remains challenging."

Citi was drowning in losses in 2008 stemming from the collapse of the US housing bubble and a worldwide financial squeeze. The company lost 18.7 billion dollars in 2008, prompting the government to step in with massive aid.

But Citi has posted profits over the past three quarters, even though shareholders are not seeing those earnings.

Goldman Sachs announced a profit of 3.19 billion dollars in the third quarter, more than triple the amount from a year earlier.

The company, one of the main Wall Street survivors of the financial crisis, said investment banking and trading activity generated robust results.

Net revenues amounted to 12.4 billion dollars, double the level of a year ago.

"Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors," said Lloyd Blankfein, chairman and chief executive.

One of the leading Wall Street investment banks, Goldman Sachs changed its charter a year ago to become a commercial bank to get easier access to Federal Reserve lending facilities to help weather the financial crisis.

These results came on the heels of JPMorgan Chase, which said on Wednesday its quarterly profit jumped to 3.6 billion dollars.

"The current earnings season is unfolding better than expected with virtually all the big name companies that have reported earnings thus far topping estimates and generally delivering revenues that were close to or above estimates," said Fred Dickson at DA Davidson & Co.

"This morning's reports from Goldman Sachs and Citigroup add to the list of companies delivering positive surprises. As a result, analysts immediately appear to have begun lifting fourth quarter estimates."

Financial shares however traded mostly lower despite the news.

"All came in above or in-line with estimates and there is not really anything wrong with the numbers when you compare them to expectations, yet there is some disappointment here from the trading floors," said Jon Ogg at 24/7 Wall Street.

"We noted yesterday how JPMorgan Chase set the bar extremely high for the rest of the financial leaders. As a result, the common theme here is profit taking in all of the majors."

Analysts say that overall the sector is on the mend but with lingering troubles from the housing sector and consumer loans.

"We believe that the worst of the credit crisis is now probably behind us," said analysts at Zacks Investment Research in a note to clients.

"But the banking system is not yet out of the woods ... We believe that the US economy will regain its growth momentum once these issues are resolved."

Zacks said the bigger banks "benefited greatly from the various programs launched by the government," but that many smaller lenders "are still in a very weak financial state."

Gerard Cassidy at RBC Capital Markets said that just as banks suffered during the recession, they will thrive as the economy recovers.

"We strongly believe the bank stocks will continue to outperform the general markets as credit costs decline over the next 12 months and earnings return to normalcy," he said.