Here’s The Simple Explanation Behind The Difference In Citi And Wells Fargo Earnings

Both Citigroup and Wells Fargo released fourth quarter earnings this morning, albeit very different results.

  • Wells Fargo reported earnings per share of $0.73 and revenue of $20.6 billion, beating estimates of $0.72 and $20 billion, respectively.
  • Citigroup, on the other hand, reported earnings per share of $0.38 and revenue of $17.2 billion, well below expectations—which had been slashed repeatedly in the last week—of $0.51 EPS and $18.46 billion revenue.

The reports are clearly reflected in the markets today—Citi has fallen over 6% today, and Wells Fargo shares are up about 1.86%.

Earlier today on Bloomberg TV, Loop Capital Markets CEO Jim Reynolds discussed the big difference between Wells Fargo and Citi that has resulted in such different earnings and market reactions: it’s the business model.

“Wells Fargo… if you look at that business model five to six years ago, you wouldn’t have liked it because you needed to be in the capital markets,” Reynolds said. “You look at that business model today, it’s fantastic, it’s beautiful. It’s got the right risk climate.”

Wells Fargo, the fourth largest US bank by assets, has kept focus on traditional retail banking operations and been slow in expanding its investment banking business, according to a Bloomberg report last week. Now, that’s paying off as a volatile global economy has sapped investment banking revenues at banks. JP Morgan’s 4Q earnings reported a 52% decrease in year-over-year investment bank revenue. Earlier today, Citi reported its investment banking revenue had a 45% revenue decrease compared to the same period in 2010.

It will also be much easier for Wells Fargo to meet Dodd-Frank requirements, including the impending Volcker Rule—which has caused many banks unwind major trading desks. The bank has also been rewarded with a higher market value than other major U.S. banks, including Citi and JP Morgan.

Bloomberg TV’s Dominic Chu pinpointed the key issue to ponder: Whether Wells Fargo’s “slow and steady” business model will actually pay off in the end. Since 2012 will be a key year to observe the effects of global and domestic regulation and higher capital requirements, we’ll know in due time.

Here’s a video of the discussion: