Cloudy with a chance of excuses

Volatility is the new weather for Citi and BofA

Volatility is the new weather for the likes of Citigroup and Bank of America. The two mega-banks joined JPMorgan in blaming market ups and downs for crimping trading revenue and thus hurting overall earnings. That's rich after years of claiming conditions were too docile. It doesn't mask the deeper problem the lenders have, either.

Bank of America's $2.7 billion of net income applicable to common shareholders in the fourth quarter equates to an annualized return on equity of just 4.8 per cent. That's after Chief Executive Brian Moynihan completed probably the industry's largest cost-cutting program ever, slashing $8 billion over a few years from expenses that totaled $59 billion in 2014, excluding interest and litigation costs.

Michael Corbat, his counterpart at Citi, presided over an even worse headline performance. The annualized return on equity in the fourth quarter was a minuscule 0.4 per cent. That was dented by $3.5 billion set aside to cover legal costs. Investors knew about that already after the bank made two surprise announcements during the period.

Strip the litigation item out and the RoE figure jumps to around 6.6 per cent. That's actually better than the 5.9 per cent BofA managed on a comparable basis, with $350 million of legal costs and $600 million of accounting-related hits added back. The trouble is, these returns still fall well short. These two big banks aren't getting close to covering the 10 per cent cost of capital many investors use as a rule of thumb.

Even if the banks' traders picked the right side of volatile markets, they couldn't close the gap. In the last quarter, Citi and BofA both raked in about a fifth less buying and selling bonds, currencies and commodities than in the same period of 2013.

If they had managed the same showing, their equity returns would have been around half a percentage point higher. Even factoring in the better showing in the third quarter of 2014 only adds a little more. Double-digit returns would still be out of reach.

Federal Reserve interest-rate hikes could alleviate some of the pain. But without further cost cuts - or regulators suddenly allowing the return of a lot of capital to shareholders following upcoming stress tests - executives may need to find more excuses for poor earnings.