Citigroup leads a bleak banking field

Earnings in the sector are going to be bad after the recent mortgage turmoil. But amid all the dark news is the possibility of a stock bounce.

By Jim J. Jubak Sep 26, 2013 10:47AM
Images: Bank Vault (© Radius Images/Jupiterimages)We know that the big U.S. banks are going to deliver a lousy third quarter when the earnings season starts with Alcoa (AA) on Oct. 8.

So is there any reason to own any of the big U.S. banks as the sector gets ready to stink up the joint?

Maybe. Selectively. And I'd say Citigroup (C) would be my top pick among big U.S. banks right now. (Citigroup is a member of my Jubak's Picks portfolio.)

It's hardly a secret that third-quarter earnings are going to be bad, since the big banks have been cutting jobs in their mortgage units right and left as refinancing volumes slump. Citigroup has let 1,000 people go in its mortgage unit and Wells Fargo (WFC) has fired 4,000. JPMorgan Chase (JPM) has told Wall Street to expect a 20% to 30% quarter to quarter drop in mortgage banking revenue in the quarter.

And that's just the beginning of the sector’s woes. Revenue from trading is likely to fall heavily in the quarter on a slowdown in fixed-income revenue. JPMorgan and Barclays have said that third-quarter trading revenue for 2013 is likely to be below that for the third quarter of 2012.

Citigroup's revenue from fixed-income, currency, and commodities trading is likely to fall by 25%, Sanford C. Bernstein & Co. projects.

Let's finish off our litany of woes with the piles of cash that big U.S. banks are paying -- or are likely to pay -- to regulators or investors. For example, JPMorgan Chase will pay $920 million to settle charges that it violated federal securities laws in the London Whale trading scheme. The company faces a likely $3 billion to $7 billion settlement of $11 billion in claims over the packaging of mortgage bonds that cratered in the global financial crisis. Citigroup has agreed to pay Freddie Mac $395 million to resolve repurchase claims on mortgages that the bank sold to the company.

It's the very visibility of all this bad news that makes the sector more intriguing than it might seem. Some big part of the bad news is already out there. Shares of Citigroup, for example, are down 5.7% from Sept. 18 through the close on Sept. 25. That’s a big drop for a week.

JPMorgan Chase has fallen 8.6% from Aug. 1 through the close on Sept. 25. Wells Fargo is off 6.2% from Aug. 2 through the Sept. 25 close.

There's definitely the possibility of a bounce in shares of big U.S. banks after these kinds of drops. You can see that potential in the 2.4% bounce in JPMorgan shares Wednesday on news that the company was in talks to settle that $11 billion in potential mortgage claims.

But that potential bounce runs right into a longer-term story that is likely to keep pressure on the financial sector in general. If interest rates have plunged in the days since the Federal Reserve's no-taper decision on Sept. 18 -- and yields on 10-year U.S. Treasuries have tumbled to 2.63% as of Sept. 25 from an early September high slightly above 3% -- there's a very good likelihood that they will begin to climb again as we approach the December meeting of the Federal Reserve’s Open Market Committee on Dec. 18.

And if the financial markets start to think, after the beginning of any taper, that the Fed might start to raise short-term interest rates before 2015, then banks and financials in general face even strong headwinds.

So I'd like any big bank stock that I own, therefore, to have something going for it besides a potential bounce as we head into the third-quarter earnings season.

Last quarter, Citigroup demonstrated that it had that "something else" in the form of gradually improving bad loans at Citi Holdings, the company’s huge bad bank. In the quarter, Citigroup released $525 million in reserves against the Citi Holdings mortgage portfolio. Citigroup continued to wind down its assets in Citi Holdings -- they were down by $60 billion in the June quarter from the second quarter of 2012 -- but the bad bank still has plenty of work to do with $80 billion in its North American mortgage portfolio alone.

Given the continued strength of the U.S. housing market, I think it's reasonable to expect the release of another few hundred million in reserves against that portfolio this quarter.

With Citigroup, investors have to try to balance the negatives in the short-term story against the positives in the long-term credit story. After the decline in the stock over the last week, I think it's worth holding Citigroup shares through the Oct. 15 earnings results.

Jim JubakAt the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.

Sep 26, 2013 11:32AM
Oh come on, the banks suck. They all got us in deep crap along with AIG and a couple mortgage originators and the realtors and their appraiser relatives. So the Fed got JPM to buy Bear Sterns for $10 a share after it had been over $170 PS and the Fed had loaned it $25 billion in taxpayer funds. Now the Fed and self-righteous  DOJ are suing JPM for loan fraud based on its buying Bear Sterns.  The whole financial crisis was fueled by crooks and liars in our government and Wall Street. I wouldn't touch any of the banks with a 10ft pole.
Sep 27, 2013 6:41AM
A reminder that banks have $630 TRILLION in derivatives outstanding. They prioritize ahead of stock in a liquidation of assets. The odds of repaying $630 TRILLION from the $50 to $60 Trillion in REAL currencies worldwide are-- ZERO. Derivatives have never been reconciled or audited and the creator of the base derivative formulation verified that it's flawed. ANY investment in the rigged financial sector is doomed to loss by placement in prioritization. Wouldn't it be nice if article writers focused on WHO holds those prioritized obligations so we can hunt them down and alleviate them of breath?
Sep 27, 2013 6:30AM

"I'm holding all the big bank stocks for a long-term bet. Regarding the market, I have a hunch the next job's report will be very positive. I still see 16K on the horizon for the Dow."


The delusions of a psychopath. ALL banks failed to generate the next hurdle of reserves from actual money-making not fake bookkeeping activity. It was just an article topic here on MSN. 305,000 more people out of an ever-shrinking pool of indentured and Too Scared To Quit workers filed for benefits last week. That didn't include the 750,000 banks just severed AGAIN. Any idiot can guess that the Dow will be seeing 16,000 soon... it's been fully rigged since 7,000 without an economy boosting it, so whatever is boosting it, isn't good for us OR our economy. Stocks are supposed to represent activity in businesses that do enterprise. With the majority out of work or working poor and barely able to buy the core essentials for existence, much less survival... odds are, you have more "value" in a roll of toilet paper. FACTS: 60% of America has more in piggybanks and jars than banks. Only 35% of Americans do business beyond check cashing with banks now. Chase just stopped issuing joint credit cards. They would only do that to issue MORE credit cards because they cannot make profit on shared services. The Financial Sector is in it's Death Throes.

Sep 27, 2013 12:21AM
If the big banks are cutting jobs in mortgage areas why is the government spending $85 billion a month, that is right a month. its not creating job so where is the money going. Does anyone in Washington or the White House have a clue as to what they are doing. 
Sep 27, 2013 3:06AM

I"t's the very visibility of all this bad news that makes the sector more intriguing than it might seem."


So bad news is good news, no means maybe, yes means no, and now I’m wondering if I’m investing or on a date with a 16 year old girl.


Oh well, that’s Wall Street, where buy means hold, hold means sell, and underweight means short the cr&^%p out of this thing.


Oct 24, 2013 9:41AM
So this is the end of Jubak on MSN, eh? I notice that he is no longer a headliner when you go to the Investing section. then eventually you find a statement that "MSN Market Dispatches column has been discontinued."  Wow suddenly from a big display which bragged about Jubak's record (up to Dec 2011 I think -- just *slightly* out of date!), to nothing!  Come in like a lion, go out like a lamb it seems.....
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