WRAPUP 10-Bank of America, Citi results show hurdles ahead

* Investment bank profits lower; credit losses ease

* BofA shares down 9 pct

* BofA loses more than $10 bln from market capitalization

* Merrill brokerage profit down 12 pct; assets down 3 pct

* Citi shares off 6 pct
(Adds loans at Bank of America and Citi, updates share prices
to market close, adds link to article)

By Joe Rauch and Maria Aspan

CHARLOTTE, N.C./NEW YORK, July 16 (BestGrowthStock) – Bank of
America and Citigroup shares fell as the banks’ results
highlighted the sluggishness of the U.S. economic recovery and
costs of potential regulation, offsetting better-than-expected
quarterly profits on lower credit losses.

Following JPMorgan Chase & Co (JPM.N: ) on Thursday, the
banks reported on Friday that investment banking profits fell
between 20 and 40 percent from the first quarter because
trading dried up in the wake of the “flash crash” and the
European debt crisis. That is a bleak sign for Goldman Sachs
Group Inc (GS.N: ) and Morgan Stanley (MS.N: ) (Read more about the money market today. ), due to report next
Tuesday and Wednesday.

Revenue was down broadly at Bank of America and Citi from a
year earlier and they, like their rivals, are grappling with
how their businesses will be affected by the financial reform
bill passed by the U.S. Congress on Thursday.

Executives at Bank of America Corp (BAC.N: ) and Citigroup
Inc (C.N: ) said the impact of the bill was uncertain.

In a presentation to analysts, Bank of America said the
costs from credit card reform would total $1 billion this year,
changes to service charges and other fees could cost up to $2
billion annually, while debit card reform could cost up to $2.3
billion. The bank will also report a goodwill charge as large
as $10 billion this quarter, due to new debit card fee rules.

Citi executives, like those of JPMorgan on Thursday, said
they were unable to quantify the possible costs for their
business. [ID:nN16136630]

Banks will have to eke out revenue and cut costs wherever
they can and try to make up elsewhere any revenue losses from
financial reform, said Nancy Bush, an analyst at NAB Research.

“It’s going to be this way for the next several years,” she
said. “It’s an extremely tough environment.” U.S. unemployment
hovers around 10 percent and a report on Friday showed that
consumer sentiment dropped to a near one-year low in July.
[ID:nN1653074]

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Graphic on BofA earnings http://link.reuters.com/suv87m

Graphic on Citi earnings http://link.reuters.com/pyb97m

Graphic on reserve releases http://link.reuters.com/ryh97m

Merrill Lynch profit lower [ID:nN1698282]

BofA earnings table [ID:nN15253330]

Citi earnings table [ID:nN16106449]

Analyst comment on BofA [ID:nN15213978]

Analyst comment on Citigroup [ID:nN15253117]

Breakingviews [ID:nN1697623]

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Shares of Bank of America, the biggest U.S. bank by assets,
fell their most in more than a year, down 9 percent to $13.98,
wiping more than $10 billion from its market capitalization of
$154.5 billion on Wednesday. Citigroup, which is No. 3 behind
JPMorgan, slumped more than 6 percent to $3.90. Bank of America
and Citigroup were the top two most-traded shares on Friday.

Shares of No. 4 Wells Fargo & Co (WFC.N: ), which reports
results next Wednesday, fell 5.7 percent to $26.24. The KBW
Banks Index (.BKX: ) was down 5.7 percent.

RESERVES

Bank of America and Citigroup said credit costs broadly
eased in the second quarter, allowing them to put less money
aside against future losses. Bank of America and Citi both
released about $1.2 billion net of taxes, equivalent to about
38 percent and 43 percent of their profit, respectively.

“Both reports reflect a significant improvement in credit
quality but little in the way of identifying how they’re going
to go from that to revenue growth,” said Marshall Front,
chairman of Front Barnett Associates.

Loans at Bank of America slipped about $20 billion or 2
percent to $956 billion compared to the first quarter, while at
Citi total loans fell about $30 billion, or 4 percent to $692.2
billion. Analysts and investors expressed concern about bank
executives’ comments that credit demand was still weak.

“I don’t see a great deal of demand in the near term, at
least until this uncertainty is removed,” said Citigroup Chief
Financial Officer John Gerspach, on a call with reporters.

To boost earnings without relying on reducing loss
reserves, banks are likely to increase cost-cutting, Bush
said.

Bank of America Chief Executive Brian Moynihan told
analysts on a conference call, “Over the next several years,
costs are going to be an issue for our industry, especially on
the consumer side.”

Moynihan, Wall Street’s newest CEO, took over from Kenneth
Lewis at the start of the year and has largely been lauded for
his work at the bank. He has worked to reestablish ties to the
investor community and regulators, relationships that became
strained through the financial crisis and a probe into Bank of
America’s acquisition of Merrill Lynch & Co Inc.

Bank of America also reported $1.1 billion in pretax gains
from sales of stakes in two Latin American banks. Citigroup
reported that it reduced its special asset pool for housing
toxic assets such as subprime mortgages by $38 billion. That
unit, known as Citi Holdings, now makes up less than a quarter
of Citigroup’s balance sheet.

INVESTMENT BANKS

In recent quarters, banks have depended on their investment
banking units to perform well while their consumer business was
hit by rising losses. Now, as consumer loan losses are less of
a worry, trading revenue has suffered as stock markets were hit
by a “flash crash” in the United States and sovereign debt
problems in Europe.

Revenue at Bank of America’s investment bank slumped to $6
billion in the second quarter from $9.8 billion in the first
quarter. A large part of that drop was from fixed income,
currencies and commodities trading, which fell 58 percent or
$3.2 billion to $2.3 billion. Citigroup also said its
securities and banking revenue fell, down 26 percent from the
first quarter to $6 billion.

These units were also hurt by a tax the banks paid on UK
bankers’ bonuses. The tax looks set to cost the five major U.S.
banks with businesses in London about $2.5 billion in all.

Bank of America, which bought investment bank Merrill Lynch
& Co at the end of 2008, said Merrill’s brokerage unit saw
profit fall 12 percent and its assets under management were
down 3 percent. [ID:nN1698282]
(Reporting by Joe Rauch and Maria Aspan; additional reporting
by Elinor Comlay, Dan Wilchins; editing by John Wallace, Leslie
Gevirtz, Phil Berlowitz)

WRAPUP 10-Bank of America, Citi results show hurdles ahead