United States and a simultaneous shock in Europe. Banks were
required to keep their Tier 1 capital ratios -- the strictest
measure of a bank's ability to absorb financial blows -- at 5
percent or more under the situation outlined by the Fed.
Both Bank of America and Citigroup passed the initial part of the test, but after taking into account Citigroup's plan to return capital, its Tier 1 ratio fell to 4.9 percent.
Citigroup's own executives were taken aback by the Fed decision. But as the focus shifts this week to first quarter earnings reports, Wall Street has been getting more optimistic about Citigroup.
Last week, Mr. Goldberg sharply increased his estimate for Citigroup's quarterly earnings to $1.30 a share, from 97 cents a share, thanks to one-time asset sales as well as better-performing capital markets that could raise trading revenue. He kept his Bank of America estimate flat at 9 cents a share for the first quarter.
The first indication of how big banks performed in the first quarter will come Friday, when two of the stronger companies in the sector, JPMorgan Chase and Wells Fargo, are to announce their latest results. Citigroup and Bank of America are to disclose earnings next week.
Despite Citigroup's negative stress test result and Bank of America's better performance, some analysts remain cautious on Bank of America, which recently ceded its status as the largest bank in the country to JPMorgan Chase.
Chris Kotowski, an analyst at Oppenheimer, said, "The comparison of Citi and Bank of America is one of my favorite themes." Both trade at about 70 percent of book value, and both have been steadily increasing their capital levels since the dark days of 2008. However, Mr. Kotowski favors Citigroup, largely because it does not face the mortgage-related headwinds Bank of America is dealing with.
Bank of America and the subprime giant it bought in 2008, Countrywide Financial, securitized and sold mortgages now worth $750 billion before the housing bubble burst. Of those mortgages, about $220 billion to $250 billion worth are delinquent or in foreclosure. Investors have lost about $125 billion, Mr. Kotowski said, and are trying to force Bank of America to buy back some of those securities, arguing the loans were made improperly.
Bank of America has already set aside $15 billion to cover potential losses on these so-called put-backs, but "who knows if that is enough?" Mr. Kotowski said. He added, "It could be, but there is no way to know."
Citigroup faces potential put-back losses, too, but they are only a fraction of what Bank of America is contending with, he said.
For all the similarities between the banks, earnings in the future will be driven by different factors at the two giants, analysts said. Investors in Bank of America are hoping it benefits from a recovery in the U.S. economy over all, and the American housing market in particular. Bank of America draws 78 percent of its revenue from the United States.
For Citigroup, on the other hand, more is tied to how Wall Street performs, as well as the performance of international markets, where about half of Citigroup's revenue comes from, especially in emerging areas like Asia and Latin America.
"Bank of America will get better if housing gets better," said David H. Ellison, a mutual fund manager for FBR who invests in financial companies and owns stock in both companies. "Citigroup's business is more commercial and will benefit if consumer credit improves."
The bottom line, Mr. Ellison said, is that just three years after being written off by Wall Street, "both banks are going to survive and make money; the world isn't coming to an end."
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