Earnings season is here, and investors late this week got an opening salvo of financial results from several high-profile companies. The early news has overall been fairly good, and that sent all three major market benchmarks to modest gains just after midday on Friday.
Helping to pave the way ahead for the Dow Jones Industrial Average was the banking industry, with reports from major financial institutions helping to boost confidence in the sector. However, not every bank managed to ride the coattails of the winners in the industry.
In particular, Citigroup (NYSE: C) and State Street (NYSE: STT) suffered fairly sizable declines that suggested at least some pockets of the banking sector haven't yet managed to find their way forward in a challenging interest rate environment.
Citigroup deals with falling profits
Shares of Citigroup were down 4% early Friday afternoon. The Wall Street banking giant didn't share in the success of some of its immediate peers, with second-quarter results that suffered from sluggish conditions in the investment banking arena.
Citigroup's numbers revealed the pressure the financial institution was under. Revenue eased lower by 1% year over year to $19.4 billion. Net income fell by more than a third to $2.9 billion, working out to $1.37 per share on an adjusted basis.
Citigroup's various business segments had mixed performance. The personal banking and wealth management division posted a modest 6% year-over-year rise in segment revenue, and services revenue from Citi's institutional clients group climbed by double-digit percentages. However, poor market conditions led to a 13% drop in sales from the company's markets segment, while both investment banking and corporate lending suffered drops of more than 20%.
Looking ahead, Citigroup saw net credit losses climb again, rising 78% year over year to $1.24 billion as the bank continued to build up its loss reserves. Moreover, with personal-banking average deposits down year over year, it's not evident that Citigroup has benefited from the flight to quality -- away from regional banks -- that other big financial companies have generally enjoyed, even as it tries to implement its own transformation efforts.
State Street falls short
Shares of State Street fared even worse, falling 11% early Friday afternoon. Despite including some encouraging signs, the Boston-based bank's second-quarter report wasn't able to inspire more investor confidence.
The numbers were mixed. Revenue climbed 5% year over year to $3.11 billion, based largely on an 18% jump in net interest income. Fee revenue rose at a more modest 2% annual pace, and rising expenses limited the benefit to State Street's bottom line. Net income weighed in at $763 million, up 2% year over year and working out to $2.17 per share.
A number of areas came under pressure. Servicing fees were down 3% from year-ago levels, with management fees falling 6%, and revenue from foreign exchange trading dropped 8%. In addition, compensation expenses rose 7% despite the tough business conditions, as salaries rose and State Street employed more people.
Worst of all, State Street suggested that trends in net interest income might not be as favorable as hoped. On the conference call, the bank said it expects third-quarter net interest income to fall 12% to 18% from second-quarter figures, anticipating somewhere between $550 million and $600 million per quarter for the immediate future. For those who had hoped that bank bailouts might lift State Street, the news was particularly disappointing.
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