Major Banks Report Disastrous Earnings; ARM Strategies Seen Shifting

Financial services earnings continued to show no signs of recovery as many of the nation’s largest financial institutions and some of the regional banks reported earnings last week. Analysts say that the dismal earnings could impact accounts receivable management strategy.

Bank of America and Citi led a rash of reports of sharply lower earnings, reporting results even worse than expected and leading to major financial moves. The Dow Jones Industrial Average lost more than 330 points Tuesday on bank weakness to close below 8,000 for the first time since November.

Bank of America reported a net loss of $1.79 billion in the fourth quarter, compared with net income of $268 million a year earlier. The net loss applicable to common shareholders was $2.39 billion, or $0.48 per diluted share, down from net income of $215 million, or $0.05 per share, in the same period in 2007. Results include mortgage giant Countrywide Financial, which Bank of America purchased on July 1, but not Merrill Lynch & Co., Inc., which was acquired on Jan. 1, 2009.

The bank announced that it would slash its dividend from $1.28 to 4 cents per share, while also seeking and receiving an additional $20 billion and guarantee $118 billion of assets from the government.

Citigroup Inc. is considering a major restructuring after reporting a net loss for the 2008 fourth quarter of $8.29 billion, or $1.72 per share, based on 5,347 million shares outstanding. Revenues of $5.6 billion were affected by write-downs and losses in securities and banking. Results also include $6.1 billion in net credit losses and a $6 billion net loan loss reserve build.

For the full year 2008, Citigroup reported a net loss of $18.72 billion, or $3.88 per share, resulting in the need for a major restructuring of the company.

“We announced that we would separate the company, for management purposes, into two separate businesses — Citicorp and Citi Holdings,” Citi CEO Vikram Pandit said in a prepared statement. “We are setting out a clear roadmap to restore profitability and enable us to focus on maximizing the value of Citi. We are committed to helping the financial markets recover as quickly as possible. To accelerate that recovery Citi is putting the TARP capital it has received to work to support the U.S. economy and consumers – expanding the flow of credit to U.S. households and businesses responsibly and on competitive terms.”

“The largest financial institutions tend to have the biggest losses,” added Aite Group analyst Nancy Atkinson. “It was the largest financial institutions that took the largest risks. Risks lead to rewards, so they had high earnings for some time, then things came crashing down.”

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But ARM industry experts say that those risks could impact the decisions made by banks to deal with their delinquent accounts.

One result of the current economic situation is more business for contingency collection firms because prices for portfolios of delinquent debt have plummeted, according to Paul Legrady, director at ARM industry advisory firm Kaulkin Ginsberg Company.

“In conversations with some of the largest card issuers, we are hearing about placement volumes, as a percentage of overall paper worked, shifting from portfolio sales to contingency networks,” he said.  “Not only is more paper being charged off at these companies, but more of this paper is being placed with contingency agencies as a percentage of overall treatment strategies.  This means placement levels are booming for even the small to mid-sized contingency agencies.  Of course the challenge here is not getting the business, but collecting the paper.”

But Legrady cautioned that debt collection agencies and debt buyers need to talk to their clients to understand their current thinking as banks and other financial services institutions are not in lockstep on the matter.

“Broadly diversified financial services companies have different units with different recovering strategies for different lines of credit,” he said. “One size does not fit all; there are different types of recovery strategies for different types of credit. The recovery strategies in this economy vary for a variety of different reasons, but most large financial institutions are not radically restructuring their recovery strategies.”

Atkinson said that she expects financial institutions such as Citi and Bank of America to sell off delinquent accounts more quickly and to attempt to better manage those that stay in house.

Editor’s Note: Kaulkin Ginsberg is the parent company of insideARM.