Bank of America and Citigroup are giving investors nothing but reasons to fret.
The stocks of the two American banks were among the best performers last year. Bank of America’s doubled, while Citigroup’s jumped by 50 percent. But their fourth-quarter earnings, which both announced on Thursday, offer little to support further optimism.
Both of them had a messy final three months of the year, full of litigation costs and other charges. Bank of America’s chief executive, Brian Moynihan, had to book $5 bilion of charges stemming from an attempt by his predecessor, Ken Lewis, to build the nation’s largest mortgage lender and servicer with purchases like the disastrous Countrywide Financial. It also took a $700 million accounting hit because improving credit made its own liabilities go up in value.
There were some offsets, like a $2.4 billion tax break. Stripping out all the one-offs bumps Bank of America’s fourth-quarter net income to around $2.2 billion, about triple the reported figure. But even that equates to a dismal 4 percent annualized return on equity.
Citigroup’s new boss, Michael L. Corbat, has done better.  The bank set aside $1.3 billion for mortgage litigation and $1 billion to help pay for the restructuring Mr. Corbat announced last month. Back those out, as well as a $485 million accounting loss as Citigroup’s creditworthiness improved, and the bank earned $3 billion â€" also almost triple the official showing.
Yet even on that basis, Citigroup’s annualized return on equity was only 6.4 percent, way below the rule of thumb of 10 percent needed to beat the cost of capital. JPMorgan Chase has been running above that level for a while, and Goldman Sachs nudged its full-year 2012 return to 10.7 percent largely by setting much less aside for pay in the last quarter.
With their rivals more solid, Mr. Moynihan and Mr. Corbat are under even more pressure to perform. Their costs are still way too high. Bank of America’s ratio of expenses to revenue, for example, was  86 percent last year, more than 25 percentage points higher than the average for institutions with government-insured deposits, according to the Federal Deposit Insurance Corporation. U.S. Bancorp, meanwhile, is at 51 percent.
There are bright! er spots.! Bank of America’s deposits increased 4 percent to $1.1 trillion. When interest rates finally move higher, lending them out should increase margins. But that - and the end of both banks’ post-crisis hangover - could be a long way off.
Antony Currie is an associate editor and Agnes T. Crane is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
