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Bank of America profit trails as Citigroup, JPMorgan go abroad

Bank of America Corp. does more business in the U.S. than any of its competitors, and that's eroding returns for shareholders of the Charlotte, North Carolina-based company.

Demand for financial services is increasing three times as fast outside the U.S., fueled by companies and investors in Brazil, China, India and Russia. While Bank of America operates in 45 countries, they produce only 13 percent of its revenue. That's puny compared with Citigroup Inc., which derives almost half its sales from abroad and ranks among the biggest banks in Mexico, Poland and South Korea.

The same domestic focus that made Bank of America, Wachovia Corp. and Wells Fargo & Co. the best performing of the biggest U.S. bank stocks during the first half of the decade is working against them now. With Europe and Asia accounting for more than half of the world's economic output and home to six of every 10 millionaires, the banks and securities firms that expanded internationally stand to benefit most.

"Bank of America is largely a play on the U.S. and it's suffering more because the domestic economy has been growing at sub-3 percent," said Chris Hagedorn, who helps oversee about $22 billion at Cincinnati-based Fifth Third Asset Management, which owns shares of Citigroup, Bank of America and Wachovia. "The growth right now is coming internationally."

Kenneth Lewis, Bank of America's 60-year-old chief executive officer, is unswayed. He says the U.S. represents the best opportunity because it's still the world's single biggest source of banking, brokerage and money-management fees. "We do better when we play to our strengths, and our strengths are in the U.S.," Lewis said in a June 19 interview in New York.

Earnings Week


For now, the geographic divide between U.S. banks is growing, and it may widen even further this week when the five largest, Citigroup, Bank of America, JPMorgan Chase & Co., Wachovia and Wells Fargo, report second-quarter results. Analysts surveyed by Bloomberg estimate that New York-based Citigroup, led by CEO Charles Prince, increased earnings by 7.7 percent, and JPMorgan, which gets a quarter of revenue from outside the U.S., had a 6.4 percent gain. Bank of America may post a 2 percent profit drop, its first decline since 2005, the survey shows.

The situation is already playing out on Wall Street, with Lehman Brothers Holdings Inc. generating almost all of its $1.1 billion increase in second-quarter revenue from international markets. Lehman, the fourth-largest securities firm, said profit increased 27 percent in the three months ended in May.

U.S. Forecast


Lewis points to research by McKinsey & Co. and studies by Bank of America that show the U.S. will generate the largest pool of banking fees over the next decade. He predicts that Bank of America can boost earnings per share by 10 percent a year just by gaining a greater share of the U.S. market and making selective investments overseas. Bank of America became the nation's largest private bank earlier this month with the $3.3 billion acquisition of U.S. Trust Corp. In addition to holding the most U.S. deposits, Bank of America also is the nation's biggest credit-card issuer.

While Bank of America has plans to expand in some developing markets, such as China, it's scaling back operations in others. Last year, the bank swapped its Brazilian unit for a stake in Banco Itau Holding Financiero SA, completing a two-year effort to dispose of assets acquired in the 2004 purchase of FleetBoston Financial Corp.

Second Guessing


Investors have second-guessed Lewis before and lost. When Bank of America agreed to buy FleetBoston in October 2003, its shares tumbled 10 percent. Shareholders rebelled similarly after Lewis proposed buying credit-card issuer MBNA Corp. in June 2005 for 30 percent more than market value. In both cases, Bank of America met or exceeded the cost savings Lewis promised. In Lewis's first five years as CEO following his promotion in April 2001, Bank of America's stock gained 72 percent. Citigroup's rose 4 percent and JPMorgan's fell 11 percent.

"Up to now you have to give Ken Lewis a lot of credit," said Marshall Front, who helps manage about 500,000 Citigroup shares and 300,000 Bank of America shares at Front Barnett Associates in Chicago. "Our largest holding has been Citigroup, and it hasn't particularly been a good investment."

The tables have turned during the past year. Bank of America shares advanced 2.5 percent, while Citigroup gained 10 percent and shares of New York-based JPMorgan jumped 22 percent.

"Underappreciated" Franchise


Citigroup is an "underappreciated global franchise, with first-mover advantage in a lot of developing countries," said Hagedorn of Fifth Third. In the U.S., "banks are looking at 2 percent earnings growth, and that's not terribly exciting." Bank of America's overseas strategy has centered on partnerships. Under Lewis, the company has spent almost $5 billion since 2002 taking stakes in China Construction Bank Corp., China's third-biggest bank, and Grupo Financiero Santander Serfin, Mexico's No. 3 bank.

For now, Bank of America is limiting its international expansion mainly to capital markets and credit cards. The company will invest $300 million to $400 million over the next several years to gain a greater share of securities sales and trading in Europe and Asia. Lewis also wants to sell banking products to credit-card customers in Europe by direct mail. Bank of America's $35 billion purchase of Wilmington, Delaware-based MBNA last year made it a leading credit-card issuer in the U.K., Ireland and Spain.

"Tipping Point"


International markets don't come without the kinds of risks Bank of America's Lewis prefers to avoid. Citigroup said it would shut about 80 percent of its consumer-finance branches in Japan earlier this year after the government passed legislation capping interest rates. The company raised its loan-loss reserves in Japan by $375 million and had closure costs of $40 million.

Morgan Stanley, Citigroup and Bank of America all are scheduled to stand trial in coming months for their financing of Parmalat Finanziaria Spa, the Italian dairy company that went bankrupt in 2003 after revealing a 3.95 billion-euro bank account didn't exist. The banks face allegations that they didn't have sufficient internal controls to prevent Parmalat employees from committing fraud.

Source: Bloomberg
Date: 16.07.2007 [58]
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