B of A, Citigroup hurt by loan losses, stock market woes

Monday, April 16, 2001 | 10:43 a.m.

SUN STAFF AND WIRE REPORTS

New bank merger

CHARLOTTE, N.C. -- First Union Corp., the nation's sixth largest bank, today' said it's buying Wachovia Corp. for about $13.4 billion in stock in a deal that would unite the two North Carolina banking rivals into the nation's fourth biggest banking company.

The deal would create a bank with $324 billion in assets, trailing only Citigroup Inc., J.P. Morgan & Chase Co. and Bank of America Corp. among U.S.banks.

About 7,000 jobs will be cut over the next three years as part of the deal, the banks said, roughly half of them through attrition. That represents about 7.8 percent of their combined 90,296 employees.

Bank of America Corp., the largest U.S. bank by deposits and the second-largest in Nevada, today said its first-quarter profit fell 17 percent as the company set aside more money to cover the possibility that more customers won't be able to pay back loans.

And Citigroup Inc., the largest U.S. financial services company, said first-quarter profit fell 7 percent as the stock market slump sliced earnings from venture capital investments and expenses rose.

Citigroup's Citibank unit operates a big Las Vegas call center as well as Las Vegas retail branches.

Bank of America's profit dropped to $1.87 billion, or $1.15 a share, from $2.24 billion, or $1.33 in the year-ago quarter, the company said.

As the economy slowed in the past year, more customers were unable to pay back debt, prompting the bank to write off the bad loans and increase its cushion against further losses. The falling stock market also bit into more of the bank's profit as it posted a $416 million decline in its equity investments.

The company's loan loss provisions almost doubled to $835 million from the $420 million it set aside in the first quarter last year. In the fourth quarter, the company set aside $1.21 billion after a handful of large corporate customers ran into financial trouble.

"I'm glad that they are increasing the reserves because they are more at risk (to bad loans), more so than other banks," said Stephen Atkins, a portfolio manager at Northern Trust Value Investors, which holds shares of Bank of America.

Bank of America is one of the largest unsecured creditors to California's largest utility, PG&E Corp.'s Pacific Gas & Electric unit, which filed for federal bankruptcy protection earlier this month.

The second-largest arranger of loans in the U.S. wants to boost profit by increasing investment-banking business 20 percent in the next two years. As part of the plan, the bank is reducing less-profitable lending by turning down requests to renew $20 billion of loans over the next 18 months.

The bank wrote off $772 million in uncollectible loans, up from $420 million in the first quarter last year. It wrote off $1.08 billion in bad loans in the fourth quarter in 2000. The bank said $243 million of the first quarter increase in those losses came from its U.S. commercial loan portfolio.

Bank of America said it had $5.6 billion of bad loans in the first quarter, compared to $3.3 billion a year earlier.

Bank of America will get a new chief executive next week when Hugh McColl steps down after 20 years at the helm. He will be succeeded by President and Chief Operating Officer Ken Lewis on April 25.

The Charlotte, N.C.-based company said net interest income -- the money the bank makes from lending -- rose 3 percent to $4.72 billion on a fully taxable basis from the same period last year.

Non-interest income, which Bank of America collects on service charges, investment banking fees and equity investments, fell 7 percent to $3.78 billion from the first quarter last year.

The company's per share earnings beat the average analyst estimate of $1.12, according to a First Call/Thomson Financial survey.

Bank of America, the second-best performing stock in Standard & Poor's index of 23 banking shares this year, is up 15 percent in 2001. Its shares rose $1.20 to $54.15 in early trading today.

In the meantime, Citigroup -- the parent of the Travelers insurance companies, Salomon Smith Barney and Citibank -- said profit from operations fell to $3.66 billion, or 71 cents a share, from $3.94 billion, or 76 cents. Net revenue rose 6 percent to $20.2 billion.

Revenue at New York-based Citigroup's investment and corporate bank, including Salomon Smith Barney, rose 7 percent to $5.7 billion. Trading generated $2.3 billion, a 35 percent gain. Consumer finance revenue rose 18 percent to $1.78 billion.

"This speaks to the strength of their diversified franchise," said Dianne Glossman, an analyst at UBS Warburg.

Costs rose faster than revenue after the $30 billion acquisition of Associates First Capital Corp. engineered by Citigroup Chairman Sanford I. Weill last year. The company said it was taking steps to reduce costs, and earlier this month said it was cutting several hundred employees. Citigroup's results include an $80 million after-tax charge for severance and other costs related to reducing its staff.

"The strength and diversity of our earnings by business, geography, and customer helped to deliver a strong bottom line in a period of market uncertainty," Weill said in a statement.

Citigroup's return on equity, net income divided by book value, fell 19 percent to 21.7 percent.

Total operating expenses rose 12 percent from the year-earlier period to $10.5 billion led by a 16 percent increase in compensation expenses. Compensation expenses at Salomon rose 20 percent to $2.9 billion from $2.4 billion in the year-earlier period.

Investment banking revenue at Salomon Smith Barney jumped 24 percent to $1.2 billion as the unit collected fees from advising America Online Inc. in its purchase of Time Warner Inc. and benefited from the surge in bond sales last quarter.

The gain contrasted with declining investment-banking revenue at stand-alone securities firms such as Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc.

Income from Citigroup's investments in other companies, though, fell to $136 million from $633 million in the first quarter last year, when the Nasdaq Composite Index hit a record high. With that index down 26 percent in the latest quarter, the value of Citigroup's investments has dropped, accounting for much of the company's earnings decline.

Revenue from principal transactions, or trading for the firm's own account, rose 35 percent to $2.3 billion for the quarter.

The company's consumer business, which includes profit related from Associates First, had first-quarter income of $1.78 billion, up 18 percent from a year earlier. Interest rates have lowered the cost of raising the money Citibank needs to lend. A drop in interest rates also encouraged consumers to borrow, helping increase the company's revenue.

Plunging U.S. stocks led to a 12 percent decline in total client assets in Salomon Smith Barney's brokerage. Commission revenue fell 22 percent to $1 billion.

Assets in financial-consultant managed investment accounts at Salomon fell 6 percent to $52 million. A 9 percent increase in brokers paired with the decline in commissions and assets led to a 27 percent fall in broker productivity to $439,000 each.

Citigroup profit beat the 70 cents forecast by analysts in a First Call/Thomson Financial survey.

Citigroup shares are down 7.4 percent this year. They slid 5 cents to $47.25 this morning.

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