April 20, 2010 - Bank earnings are upon us. Citi reported a $4.4 billion profit, the largest positive number in 3 years. Last week JP Morgan Chase and Bank Of America had great numbers to crow about as well. Part of the good news came from lower loan loss reserves as the economy begins to get some traction on the up side. But some of the positive report was a result of bond trading and/or investment banking. And that's a little troubling.

On the investment banking side, the deals are large. So are the fees. When mergers and acquisitions or new issues are flowing, earnings soar. But when that window of opportunity closes, there's a wall behind it, and when investment banking hits it, everything goes to zero. And it can happen in a day. All that needs to change is the psychology of the market, turning negative from positive due to any number of reasons. Investors have been through these cycles before and pretty much discount the contribution from trading and banking deals.

In other words, this was a great quarter for Citi. Just don't expect it every quarter because we don't know how long the current good fortune in bond trading and deals will last. To give an idea of how volatile earnings are in the banking sector, Citi had a profit of $4.4 billion in the most recent quarter. In the previous quarter, it had a loss of $7.6 billion. In the first quarter of last year, profits were $1.6 billion. So a smooth path has yet to be found by Citi.

In contrast, U.S. Bancorp reported higher revenues and profits based on traditional banking. Revenues were $4.3 billion, up 11.3% year over year. The bank said there was growth in interest income and fee income. As mentioned above, these are the traditional banking sources of growth and income. Bank earnings were $669 million or 34 cents a share for the first quarter, in line with consensus estimates. Last year's first quarter made 24 cents a share. The final quarter of 2009 saw 30 cents a share. On the down side, credit losses and non-performing assets trended higher. However the rate of deterioration slowed for the quarter. U. S. Bancorp has a more traditional banking business, one that investors understand and can judge more easily because earnings come from rather predictable sources.

As investors, we always need to look beneath the headlines and see where the big numbers come from. While a large profit is great (Citi), if it comes from volatile sources (trading and deal fees), investors won't give that nearly as much value as profits from steady growth (US Bancorp).

As one measure of investors' confidence in each stock, the Price to Sales ratio is a good one. The higher the rating, the more investors are willing to pay for consistent growth in revenues. For Citi, the ratio is 3.35. For U.S. Bancorp, it's 4.84.

- Ted Allrich