It might be a stretch say that the finance and credit sectors are completely out of the troubled economic woods at this point, but two strong earnings reports Wednesday morning surprised the market. Citigroup and Bank of America both impressed – Citi with the fact that it earned a profit, and BoA because of the size of its earnings.

Analysts had forecasted a loss of 37 cents per share for Citigroup, so you can imagine the shock after the company posted a $3 billion second-quarter profit, which amounts to 49 cents per share. Even after paying preferred dividends, the company easily trounced last year’s $2.86 billion (55 cents per share) loss for the second quarter. Citi leaders credit gains in the value of some of its assets for part of the improvement. Much of the company’s best assets had been significantly devalued during the heart of the financial crisis.

Bank of America of boasted a $2.42 billion second-quarter earnings despite the fact that the company experience increased losses from failed loans. Compared to the previous year’s second quarter when earnings were $3.22 billion, or 72 cents per share, BoA’s 33 cents per share gains seem small. The earnings easily topped analyst estimates, according to Thomson Reuters, which called for 28 cents earnings.

Despite the positive earnings, both Citi and BoA warned about their outlooks for the rest of 2009, based on expectations for continued struggles with bad debt and failed loans. The question is, how are these companies making so much money if they have so much bad debt on their books?

Bank of America joined Goldman Sachs and JPMorgan Chase in crediting successful trading businesses for much of the profit in the midst of credit turmoil. This demonstrates that advantage of companies diversifying revenue generators and profit sources. BoA acquired Merrill Lynch & Co. earlier this year.

Given the warnings from the finance companies in the last couple days, in the middle of positive earnings reports, it appears most of the major creditors believe loans are going to remain an issue for the rest of the year. This suggests that consumers and businesses looking to find credit may still face some obstacles.

The good news is that even if the rest of 2009 sees the continued weeding out of bad loans and foreclosed homes, at least most of the top banks now appear to be in stable financial condition. Their ability to turn a profit thanks to other business channels should help keep them in a strong enough position to hold up until more advantageous credit conditions return.

Neil Kokemuller
8:49 AM EST
Friday, July 17, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices.

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