Big banks benefit as loan book red ink recedes

Bank of America and Citigroup yesterday reported better-than-expected quarterly results as Wall Street heavyweights continue to benefit from receding losses on their loan books.

But, as with JPMorgan Chase on Thursday, the banks' investment banking profits fell - a bleak sign for Goldman Sachs and Morgan Stanley, which are due to report next week.

Yesterday's results came a day after US Congress signed a sweeping financial reform bill that will curb some lucrative businesses for the banks, such as over-the-counter derivatives' trading.

Bank of America reported net income of $3.1 billion (2bn), down from $3.2bn a year earlier but ahead of market hopes. Citigroup, meanwhile, said second-quarter net income fell 37 per cent to $2.7bn - again higher than Wall Street was expecting and the bank's second consecutive profitable quarter. The result was largely due to a one-off after-tax gain of $6.7bn in the year-ago quarter.

Shares in both groups came under pressure amid an uncertain outlook.

Citigroup chief executive Vikram Pandit warned: "Economic conditions remain challenging and global regulatory frameworks are uncertain."

Revenues at Bank of America's investment bank slumped almost 40 per cent to $6bn from $9.8bn in the first quarter.

The firm has benefited from this unit - which dramatically increased in size in 2009 after its purchase of troubled investment bank Merrill Lynch & Co - offsetting losses on its rising consumer loans.

Citigroup also said its securities and banking revenues fell.

Keith Davis, financial sector analyst at Farr, Miller & Washington, said: "The question is, how are they going to generate earnings aside from dropping the reserve to the bottom line?"

JPMorgan on Thursday reported a second-quarter profit of $4.8bn, up 76 per cent from a year earlier.

President Barack Obama has said the broadest overhaul of US financial rules since the Great Depression will provide economic security to American families and businesses.

Gerard Fitzpatrick, portfolio manager at Russell Investments, said: "Several factors exist within this reform which could pose a risk to the financial services sector and ultimately force the American people to continue paying for Wall Street's apparent past mistakes.

"Ultimately, only time will tell if the additional risks from this overhaul of regulation will offset the expected benefit, that the probability and severity of future crisis will actually be lower."