XLF, Banking and Financial Sector Stocks

» Jen_ - Bank of America : BAC

<img src="/files/mysites/jen14/bofa.gif" width=200 height=200 align="left"> Clean Machine

Bank of America is poised to prosper as the economy turns

By JACQUELINE DOHERTY

Be careful what you wish for. For much of the '90s, America's big banks longed to be more like brokers, selling equities, advising on mergers and acquisitions -- and reaping fat commissions in the process.

Then the stock market turned south, corporate fraud at the likes of Enron and WorldCom began to unravel, and analysts and investment bankers found themselves on Capitol Hill being grilled by Congress about their role in the disasters.

Just as suddenly, good old-fashioned commercial banking started looking attractive again. And for Bank of America, the nation's third-largest bank, that's good news.

<img src="http://www.suite101.com/files/mysites/je..." width=161 height=295 align="left">BofA headquarters over Charlotte

The bank, based in Charlotte, N.C., generates 63% of its revenue from retail and middle-market banking -- that is, lending to companies with $10 million to $500 million in revenue. And though it isn't altogether free of exposure to the capital markets -- Bank of America purchased Montgomery Securities for $1.2 billion in 1997 -- it gets just 27% of its revenue from market-sensitive businesses. Compare that with its two larger rivals: Citigroup, where 45% of revenue is market-sensitive, according to research by Prudential Securities; and J.P. Morgan Chase, which derives 50% of revenue from businesses related to the markets.

And Citigroup and J.P. Morgan are embroiled in the Enron scandal, BofA looks clean as a whistle.

"Bank of America is a much more traditional, spread-driven bank than J.P. Morgan or Citigroup," says Brock Vandervliet, a bank analyst at Lehman Brothers. By that he means BofA earns the bulk of its profit on the difference between what it pays to borrow money and what it charges to lend it out. Vandervliet has an Overweight rating on the shares, with a 12-month price target of 82 -- about 20% higher than the current quote.

Granted, the bank did make some bum loans in the current credit cycle, advancing money to Enron and Adelphia, both now under Chapter 11 bankruptcy protection. And it still has loans that are under a cloud, such as those to Dynegy and Qwest Communications.

But with the economy seemingly turning the corner, many credit-watchers think loan delinquencies have peaked. If so, Bank of America's earnings will get a handsome boost as loan losses level off and slowly decline.

Last year BofA posted earnings of $6.8 billion, or $4.18 a share, on revenue of $52.6 billion. That was below the bank's record earnings of $4.52 a share in 2000, of course, but it's a far cry from the previous recession, in the early '90s, when many banks were in crisis and some teetered on the edge of insolvency.

Indeed, Bank of America now looks as solid as it has ever been. In the first quarter of this year, BofA had a Tier-one ratio, a measure of a bank's capital adequacy, of 8.09% -- more than double the 4% required by regulators. Return on equity, another important measure of a bank's efficiency, was 18.5% -- the best in years.

Analysts expect Bank of America's earnings to rise to $5.66 a share this year -- a number embraced by management -- and $6.30 in 2003. At a recent quote of 70, the company's stock trades at 12 times 2002 earnings estimates and 11 times 2003's expected results. In addition, the shares boast a rich 3.5% dividend yield.

But while Bank of America's stock has risen 50% from last year's low of 46.75, its price-to-earnings ratio on 2003 earnings even now only matches its projected 11% growth rate. Wells Fargo, considered the best-run of the big banks, trades at 14 times '03 estimates, and Bank One fetches a multiple of 13.

That's a thorn in the side of BofA Chief Executive Ken Lewis. "We think we have the earnings power, the diversity, the markets and the discipline and focus going forward to justify a premium P/E," he told Barron's in an interview.

Not everyone is convinced. James Moynihan III, a senior equity analyst at Evergreen Investments, which owns BofA shares, explains why some investors remain skittish: "The investment community doesn't want to pay a premium until Bank of America has proved it isn't going to make an acquisition."

That's a legitimate beef. Though Lewis has pledged to increase earnings organically -- through cost cuts and higher sales -- Wall Street is taking a show-me attitude, and with good reason.

During the 18-year reign of former CEO Hugh McColl Jr., the company made about 60 acquisitions. The present-day corporation includes vestiges of North Carolina National Bank, Boatman's Bancshares, Barnett Banks and the last and largest deal: the $60 billion merger of NationsBank and BankAmerica in 1998. And all that gobbling resulted in a huge case of indigestion.

For example, after NationsBank, the No. 3 player in Florida, bought Barnett Banks, the market leader, the combined entity had to sell 60 branches and close others, displacing customers and employees and driving market share in the state down from the mid-20s in 1998 to 21% today.

Lately, however, Lewis, a 33-year banking veteran who took the CEO spot last year, has started to get some recognition. "Lewis has been a huge positive surprise," says Ruchi Madan, a bank analyst at Salomon Smith Barney. "No one expected someone from inside the old regime to make such positive changes."

Lewis certainly has the credentials of an insider. The 55-year-old Mississippian joined North Carolina National Bank, known as NCNB, shortly after he graduated from Georgia State University 1969. Back then Lewis wasn't sure what he wanted to do, so he joined the bank to get exposure to all types of companies.

"I had a lot of work experience," says Lewis. "But I didn't have an Ivy League education and my parents weren't rich. NCNB was an upstart too, but it had huge aspirations."

That suited Lewis just fine. "I saw this very competitive environment and a lot of overachievers -- people who wanted to beat Wachovia, which at the time was the largest bank in the Southeast," he recalls. "It fit my personality and that's why I ended up there."

Ironically, as a credit analyst Lewis analyzed Bank of America. "Their growth of deposits was bigger than all of NCNB," says Lewis. "I do remember that pretty vividly."

Bank of America has four main business divisions: consumer and commercial banking, global commercial and investment banking, asset management and equity investments. In the first half of 2002, the consumer and commercial-banking unit generated 63% of the bank's revenue -- a level Lewis would be quite happy to sustain.

BofA's global commercial and investment banking operations, which targets large corporations, chipped in 27% of revenue. Lewis would like to reduce that contribution slightly, as he doesn't expect a big rebound in the capital markets and would like to see less volatility in the bank's results.

At the same time, he hopes to build up the bank's asset-management arm, which offers mutual funds and private-banking services. In the first half of this year, asset management contributed 7% to revenue. Lewis would like to double that number. "Companies that get the best multiples over time are those that give investors good growth rates with less volatility," he says.

So what about the recent rumblings that BofA has shown interest in purchasing either Merrill Lynch or Credit Suisse Group's Credit Suisse First Boston? Lewis declined to comment, but people close to the company say the rumors are untrue.

In any case, Bank of America's investment-banking unit remains a mid-tier operation, even after the Montgomery deal. The firm does best in underwriting investment-grade corporate debt, a category in which it ranks fourth, with an 8.7% market share in the first half of this year, according to Thomson Financial. The firm hasn't, however, broken into the major leagues for equity underwriting, where it ranked 11th with a mere 1.9% market share, or in mergers and acquisitions, where it has a 12th-place standing with 4.9% market share.

The bank's equity investment unit makes direct and indirect equity investments. The unit earned $460 million in 2000, at the peak of the bull market. In the first six months of this year alone, it has posted a loss of $85 million.

As with other banks, since 2000 losses in Bank of America's loan portfolio has increased as the economy soured. Net charge-offs as a percentage of average loans rose to 1.05% in this year's second quarter from a low of 0.55% in December 1999.

Likewise, nonperforming loans as a percentage of loans climbed to 1.45% at the end of the second quarter from 0.85% also at the end of 1999. But as the economy improves, losses should return to more normal levels. "There's a lot of leverage in this company to an improving economy," says Steven Wharton, an equity analyst at Loomis Sayles, which holds the stock.

Indeed, if charge-off rates return to typical levels, Wharton estimates the bank will save more than $1.1 billion before taxes, or 46 cents a share after taxes.

There's reason to believe we have seen the peak in credit deterioration, says David Hamilton, director of default research at Moody's Investors Service. The number of junk-bond-rated companies around the world that defaulted rose to a peak of 10.7% in January, and has gone sideways since then, coming in at 10.3% for the second quarter.

Hamilton forecasts an 8.8% default rate for the full year 2002 and the first half of 2003. Among all companies with rated bonds, the numbers are much better, but still elevated. In January the default rate peaked at 5%. It fell to 4.4% in June, but the norm is 1%.

Bank of America's Lewis also believes we're closing in on a peak in the credit cycle. "We would declare victory if it weren't for two or three things, [including loans in] telecom, energy, Argentina and Brazil." Indeed, the bank has about $2 billion in Brazilian exposure, $3.6 billion in telecom loans and $4.3 billion in loans to utilities among its $340 billion portfolio of loans and leases.

That said, Bank of America took a number of fortuitous steps that have reduced the company's risk. Last fall it exited the subprime lending business, which often has high default rates and has come under scrutiny for high-pressure selling tactics. BofA also opted to leave the auto-leasing business, where it's tough to gauge the residual value of automobiles once the lease ends.

At the same time, the bank has pared back the large commercial loans it retains. While BofA is the second largest syndicator of corporate bank loans -- behind J.P. Morgan and ahead of Citigroup -- it retains only about 10% of the loans it originates, selling the rest to other banks and investors.

"For about two years, we've been focused on how to reduce volatility and surprises on the credit side," says BofA Chief Financial Officer James Hance.

After the BankAmerica and NationsBank merger, the combined entity found itself with too much exposure to certain corporations. In other cases, the bank decided to exit relationships with companies whose business didn't generate sufficient returns. As a result, the commercial-loan portfolio has been reduced by $52.5 billion since the end of 2000, to $151.1 billion, or 44% of total loans and leases. The bank has an additional $325.8 billion of loan commitments, which includes letters of credit, credit-card commitments and legally binding commitments.

<img src="/files/mysites/jen14/bofa3.gif" width=369 height=301 align="right">BofA also has changed the way it manages its loan portfolio. It has separated the people who manage client relationships from the folks who manage the bank's loan portfolio, deciding which loans to hold and which to sell. As a result, portfolio decisions become less influenced by relationships and more analytic.

While the bank has decreased its exposure to corporate loans, it has increased its exposure to the consumer, primarily by boosting the number of home-mortgage loans it retains on its balance sheet. BofA holds $102.8 billion of mortgages, making them 30% of the entire loan portfolio. The number of mortgages has increased 31% since the end of 2001.

Throw in home equity lines, consumer finance and credit-card loans, and the consumer-loan portfolio adds up to $189 billion, or 56% of total loans.

This shift in loan mix makes sense given that the vast preponderance of loan losses have occurred in the commercial-loan portfolio. In the first quarter BofA charged off $510 million of commercial loans, compared with $378 million of consumer loans.

The risk, of course, is that consumers will feel the pinch if the U.S. economy sours. Lewis, for one, remains confident that the economy will manage to generate growth of 2.5% to 3% in the third and fourth quarter. What's more, the bank's economists like to think they have a leg up on the economic data that track consumer health, since BofA clears more checks than the Federal Reserve and handles 13.5 million credit card accounts.

"The consumer is still out there and obviously spending at a slower pace, but still spending," says Lewis. If we were on the brink of a double-dip recession, "our underlying consumer spending trends would be much, much weaker."

Bank of America touches millions of consumers every day, with operations in 21 states and the District of Columbia, 4,246 banking centers, 13,161 ATMs, 3.8 million online customers, and 27.4 million households with a Bank of America product or service.

Lewis believes the company can grow faster than the economy because it is among the largest players in states with the fastest-growing populations, including California, Florida and Texas. In the 21 states where the company has retail-bank offices, the population growth in the next 10 years will be more than 6%, double the 3% rate for the U.S. as a whole, the bank estimates.

BofA also hopes to grow by pitching additional services to existing customers -- the Holy Grail searched for by many banks but found by few. The company's strategy assumes satisfied customers will buy more products, so it is making large efforts to see that customers are satisfied.

For example, BofA has changed its pay incentives so bankers servicing consumer accounts are no longer judged just by the amount of products they can sell to customers. Bankers also will be measured by customer service, satisfaction and customer retention. By the end of the second quarter, 43.3% of customers were highly satisfied, up from 40.6% in 2001.

The improvement may be starting to show up in the bank's new account numbers. Bank of America added 32,491 checking accounts in 2000, 193,000 in 2001 and another 248,000 so far this year.

One of the major cross-selling opportunities lies within asset management. At the end of the second quarter, BofA had $297 billion of assets under management, generating fees tied to a percentage of the assets. It also has $90.5 billion of assets in brokerage accounts, on which it receives transaction fees. And it has $41 billion of assets in custody, which the bank holds but does not manage.

Lewis's goal is to turn commercial-banking customers into investors with Bank of America. "We have 79,000 private bank clients," says Lewis, "and 300,000 prospects who are [bank] customers now." He adds that the bank has four million customers with $100,000-plus at the bank who qualify for its Premier Group, a sort of Private Banking Lite. So despite the bear market, BofA has increased the number of financial advisors and private bankers on staff by 20% this year and hopes to repeat the hiring spree next year.

Ironically, the most profitable part of the private-banking business is lending -- and lending to the wealthy isn't without hazards. In the second quarter, the asset-management unit dramatically boosted its provision for credit losses to $144 million, compared to just $63 million in the first quarter of 2001. Reportedly, the bank made $44 million in personal loans to Samuel Waksal, the former chief executive of ImClone Systems who has been indicted for insider trading and bank fraud. BofA declined to give details about company relationships.

While Lewis has made clear his intention to increase the asset-management side of the business, he has at least one large problem. Most asset managers trade at 16 times 2003 earnings estimates, which would make an acquisition at today's levels dilutive to Bank of America's shareholders.

In any case, if an attractive deal comes along, asset management could jump to 15% of revenue. Even without an acquisition, Lewis says he expects the business to grow to 10% of revenue during the next two to three years.

Bank of America has reduced its share count by more than 43 million, or 3%, in the first half of this year. At the end of June, its buyback program had 50 million shares to go. Reducing the share count boosts earnings per share.

Earnings also have benefited from the favorable movement in interest rates. Net interest income -- that is, the difference between what the bank pays for its money and what it collects in interest -- rose by $671 million, to $10.5 billion, in the first half of this year. One of the bank's sources of cheap funding: investors who have moved their money out of the stock market and into savings accounts and money market accounts yielding less than 2%.

That isn't to say that there's no risk in the business. Net interest income can get squeezed if interest rates rise and the bank's funding costs rise faster than its loan portfolios. But that risk and others should be more than offset by the expected decline in delinquent corporate loans.

And if that happens, the stock market may finally give Bank of America the premium multiple its chief so desires.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

<img src="http://chart.bigcharts.com/industry/bigc... JPM, BAC&comp=AAAAA:0&rand=7282" width=527 height=316>
BAC, JPM, C, Bank Index (BNK), S&P500 3 YR Chart

....Jen

-- posted by Jen_

» Kirk - J.P. Morgan Chase

From Briefing.com: 7:35PM J.P. Morgan Chase (JPM) 19.80 -1.75: If the after hours session is any indication, it is going to be a tough day tomorrow for the financial sector and the broader market. For the most part, J.P. Morgan Chase is to blame as the investment bank issued a disconcerting earnings warning for its third quarter that was linked to a weak trading performance and high commercial credit costs concentrated in the telecom and cable sectors.
Specifically, JPM said commercial credit costs are expected to be approximately $1.4 bln in Q3 versus $302 mln in Q2, with the anticipated increase including significantly higher charge-offs and a provision in excess of charge-offs related to the commercial portfolio. Commercial nonperforming assets are expected to increase by roughly $1.0 bln. Trading revenues, which totalled $1.1 bln in Q2, were approximately $100 mln for the first two months of Q3. The sharp slowdown was attributed to less favorable results from trading positions and a seasonal slowdown in client flow.

Although JPM refrained from providing specific guidance, it did say it expects Q3 earnings to be well below second quarter 2002 operating earnings of $0.58 per common share. The current Multex consensus estimate is $0.55. As to be expected, JPM's unsettling revelations have weighed on a number of banking and brokerage shares in the after hours session as market participants fear the likelihood of further warnings from related companies.

As for JPM, it would be remiss not to mention that its Board declared a quarterly dividend of $0.34 per share and said it intends to continue the current dividend level, provided capital ratios remain strong and earnings prospects exceed the current dividend. Be that as it may, JPM is within striking distance of re-testing its 52-wk low and is now trading at a slight discount to its book value.

We suspect the latter realization, and the understanding that its current dividend yield is an eye-opening 6.87%, will invite some investment interest and some takeover talk as it did a few months ago. Nevertheless, JPM's story isn't a very inspiring one right now as it is clear it is still struggling with a number of problems, ranging from credibility to credit quality issues, that don't appear to have a quick, and easy, solution.-- Patrick J. O'Hare, Briefing.com

-- posted by Kirk

» Jas_Jain - If I Say That I Bought Truck Load of Puts on XLF at HIghs

I sold a lot of these puts in July.

Techs and financials were the most over-values sectors in January and I loaded on shorts in these two sectors.

Short 24/7/365 and very happy,

Jas

-- posted by Jas_Jain

» Kirk - Citigroup beats by a penny; Proftis up 23%

Dow Jones Business News
Citigroup 3rd-Quarter Profit Rose 23%, Buoyed by Consumer Business
Tuesday October 15, 7:17 am ET

NEW YORK -- Citigroup Inc. (NYSE:C - News) reported a 23% rise in third-quarter earnings, as credit card growth, mortgage refinancings and a gain from the sale of the bank's New York headquarters helped offset problem loans and a weak investment environment.

The financial-services giant Tuesday posted net income of $3.92 billion, or 76 cents a share, compared with $3.18 billion, or 61 cents a share, a year earlier.

The latest figures include a gain of $214 million from Travelers Property Casualty before its spinoff, which was completed on Aug. 20, a restructuring gain of $27 million and a loss of $114 million from realized insurance investment portfolio

The year-earlier period included a restructuring-related loss of $84 million, a gain of $64 million from realized insurance investment portfolio and a loss of $58 million from discontinued operations.

Excluding items in both periods, core income came to $3.79 billion, or 74 cents a share, compared with $3.26 billion, or 62 cents a share, in last year's third quarter.

The latest result from the nation's largest financial-services firm was a penny a share ahead of the mean estimate of analysts surveyed by Thomson First Call.

"We are exceptionally pleased with the performance of our businesses this quarter, during what has been a period of challenging business conditions," Sanford I. Weill, Citigroup chairman and chief executive, said in a prepared statement. "We generated double-digit income growth while continuing to strengthen our reserves and capital position and reduce costs.

Citigroup also recorded a third quarter gain of $323 million from the sale of its building at 399 Park Ave. in New York. That amount is included in the core income figures, and incorporated into the bank's proprietary investment activities loss of $101 million, which is part of total adjusted revenue of $ 18.77 billion. In the same period last year, Citigroup reported adjusted revenue of $17 billion.

Citigroup noted that it achieved strong results despite economic problems in Argentina and political uncertainty in Brazil, as well as "exceptionally weak equities markets."

The banking giant still faces challenges. Citigroup is under pressure from investigations by state and federal regulators into charges that it provided overly optimistic research on investment-banking clients. Citigroup may have to pay huge penalties to settle those cases, which may hurt future earnings.

"We have made progress towards the resolution of the current regulatory scrutiny, Mr. Weill noted. "During the quarter, we reached an agreement with the (Federal Trade Commission) regarding consumer lending practices of the former Associates, and we also resolved with the NASD issues relating to Winstar ( Communications Inc.). We will continue to strive to have a constructive dialogue with regulators," he added.

In the third quarter, Citigroup said earnings from continuing operations came to 72 cents a share, compared with 62 cents a share a year earlier.

The firm's credit cards business contributed income of $849 million, up 21% from a year earlier.

Income from the consumer finance division edged up 1%, as 9% growth in North America was offset by a decline in international income of 11%.

Retail banking income rose 19% amid strength across all regions except Latin America because of Argentina's difficulties.

In North America, income grew by 25% paced by higher deposit volumes and 24% income growth in consumer assets, which benefitted from record levels of mortgage refinancings and substantial volume growth in student loans.

Credit costs remained high in the global corporate and investment banking business. Corporate banking core income dropped 7% to $1.2 billion as income from capital markets and banking income fell 8%. Revenue growth of 4% and cost cuts were offset by the increase in the provision for credit losses.

Income for transaction services rose 21%, helped by reduced expenses.

But private client income declined 8%, hurt by lower asset-based fees and margin interest income resulting from sharp equity market declines.

Citigroup raised its provision for loan losses by $283 million in excess of net credit losses in the third quarter, increasing the total reserve for loan losses to $10.7 billion.

Poor corporate loans and slumping capital markets continue to hamper many other multinational banks' earnings. Earlier this month, J.P. Morgan Chase & Co. (JPM) and Bank of New York Co. (BK) warned their third-quarter results would fall short of forecasts amid a sharp spike in problem loans to telecommunication and cable companies.

-Sue Goff; Dow Jones Newswires; 609-520-7835

-- posted by Kirk

» Sinewave - Bank of America Says It Plans to Fire 900 Workers to Cut Costs

Charlotte, Nov. 19 (Bloomberg) -- Bank of America Corp., the third-biggest U.S. bank, plans to fire 900 technology and operations workers by the end of the year to cut costs.

Chief Executive Officer Kenneth Lewis, in his second year in charge, is trying to reduce expenses by $1 billion a year. The Charlotte-based company expects the economy to remain weak next year, and ``it is obvious that we can't meet our 2003 budget without affecting the personnel line,'' Technology and Operations Executive Tim Arnoult said in memo to employees Monday.

Bank of America has eliminated 9,689 jobs, or 6.7 percent of its workforce, over the past year. The latest cuts amount to less than 1 percent of the bank's 134,135 jobs as of Sept. 30.

The workers being fired are responsible for programming software, processing loans and credit requests and other back- office functions, said spokeswoman Lisa Gagnon. The Charlotte Observer reported the cuts earlier today.

Bank of America is also cutting investment banking jobs. It said last month it is cutting more than 190 corporate and investment banking jobs by yearend in the worst slump in global mergers and share sales in at least five years.

The company's shares fell 48 cents to $66.93 in New York Stock Exchange composite trading. The shares are up 6.3 percent this year.

Bloomberg.com

-- posted by Sinewave

» Thruhiker - Time to sell BTO?

BTO is up about 13% or so the last 5 or 6 trading days.

BTO has announced that they will begin to pay a 10% distribution a year subject to approval. Action was taken to close the discount to NAV. Problem is that the "distribution" will be a partial return of capital if the Fund does not earn 10%. This is misleading (although other CEFs do it) as novice investors think they are actually earning 10% a year.

I was looking for an exit strategy for this Fund; now I have one.

-- posted by Thruhiker

» Kirk - Re: Time to sell BTO?

Great minds think alike? Just last night I was considering selling some of my financial stocks I diversified from HP into back in 1999 and early 2000 when you suggested BTO.

Why is BTO recovering so much ground over the others?

<img src=http://pvcharts.quicken.com/images/chart... width=470 height=250>

<img src=http://cbs.marketwatch.com/charts/int-ad... width=452 height=366>

<img src=http://pvcharts.quicken.com/images/chart... width=470 height=250>

Strange gap in BTO. How did it perform vs FSRBX and XLF which are the two I decided to buy back in 1999 and early 2000 when we were discussing these here. I was checking my XLF last night and the gains over 1999 and early 2000 buys are about 15% before I add in the dividends it paid.

I wonder if my FSRBX fund will track BTO's jump up? It has tracked fairly close for some time.

-- posted by Kirk

» Thruhiker - Re: Re: Time to sell BTO?

I own it but don't follow it very closely.

Of the recent gain of approx 13% in the last week the discount to NAV closed from approx 16% to 9% which accounted for a bit more than half the gain. The remainder was market gain.

-- posted by Thruhiker

» SteveT - Sears' Stock Up With Citigroup Credit Buy

Sears' Stock Up With Citigroup Credit Buy
Wed Jul 16,11:18 AM ET
Add Business - AP to My Yahoo!

By EILEEN ALT POWELL, AP Business Writer

NEW YORK - Citigroup is buying the credit card business of Sears, Roebuck & Co. in a $3 billion deal that allows Sears to return to its retailing roots and further bolsters Citigroup's position in the credit card industry.

The sale of Sears' $30 billion credit portfolio will put Citigroup — already the nation's largest financial institution — ahead of MBNA in total managed debt. The companies said the deal, announced Tuesday, is expected to close by year's end.

Investors embraced the move by Sears, pushing the retailer's stock up $3.67, or 10.5 percent, to $38.65 in Wednesday morning trading on the New York Stock Exchange (news - web sites) — its highest level since just before problems with the credit unit emerged last October.

Shares in Citigroup declined $1.06 to $45.77. The company announced Wednesday that 70-year-old Sanford I. Weill is giving up his CEO's job and will be succeeded this year by longtime confidant Charles O. Price.

Sears, which is based in Hoffman Estates, Ill., will actually realize $6 billion from the sale of its portfolio, the country's eighth-largest. Besides the $3 billion cash from Citigroup, Sears will retain $3 billion in capital it had in the portfolio as a reserve against nonpaying accounts.

The sale also provides Sears an influx of badly needed cash, but deprives it of an important, stable source of income at a time when the retail industry is struggling.

Sears' credit card business has 59 million accounts, including 25 million that are active.

The portfolio would raise Citigroup's total managed debt to nearly $169 billion. The next largest is MBNA's $107 billion portfolio. The Sears portfolio is made up of 58 percent Sears cards and 42 percent MasterCards.

Sears said it would use the $4.5 billion after-tax proceeds to reduce debt, fund general operations and to return cash to shareholders.

The deal must be approved by federal and state regulators.

Shortly after the transaction was announced, the Standard & Poor's credit agency downgraded Sears' debt to BBB from BBB-plus.

"The downgrade reflects the absence of this historically important foundation to the credit rating and its operating income (approximately $1.5 billion in 2002), and a greater reliance on a retailing business that has a very challenging future," S&P analyst Gerald Hirschberg wrote.

Citigroup said the purchase also includes Sears' Financial Products business and credit card facilities, with approximately 8,300 employees.

Robert B. Willumstad, president of Citigroup and chairman and chief executive of Citigroup's Global Consumer Group, said during a conference call with analysts that the purchase would give Citigroup greater access to the Hispanic market, which the New York bank has sought to woo.

"Sears is a unique franchise, as 60 percent of U.S. households are Sears customers, including a significant Hispanic customer base — a key focus of our consumer business marketing efforts," he said.

Sears said in March it was looking to sell the credit card division to focus on its retail operations. A company spokesman would not identify any other bidders.

Sears said that as part of the transaction, Sears and Citigroup will enter into a marketing and servicing alliance with an initial term of 10 years.

Under the alliance, Citigroup will provide credit and customer service benefits to Sears' proprietary and Gold MasterCard holders, Sears said.

The retailer said it expected to receive about $200 million in annual performance payments from Citigroup for new account and credit sales generation activities. In addition, Sears expects to realize annual savings of more than $200 million as Citigroup will absorb costs associated with Sears' zero percent financing program.

"This is a great deal for Sears, its customers and shareholders," said Alan J. Lacy, Sears chairman and chief executive officer. "Our customers will enjoy broader credit and financial products opportunities and continued high levels of service, while Sears gains an additional source of profitability and greater financial flexibility."

Sears reported $35.7 billion in merchandise sales and services revenue in 2002.

-- posted by SteveT

» Kirk - Good Earnings Numbers from the Group

Morgan Stanley greatly exceeds Wall St. forecast
(8:11 AM ET) NEW YORK (CBS.MW) -- Morgan Stanley(MWD: news, chart, profile)reported third-quarter net income of $1.27 billion, or $1.15 per share, up from $611 million, or 55 cents per share. The company soundly beat the forecast of 69 cents per share in a survey of analysts by Thomson First Call. Changes to the terms of the company's equity-based compensation program made in the third quarter increased net income by $350 million and diluted earnings per share by 32 cents. Revenue was $5.3 billion, up 13 percent from the year-ago period and 4 percent ahead of the second quarter. The investment bank cited a pick up in equity underwriting and retail securities, and an "outstanding" quarter in its bond business. Shares of Morgan fell $1.23 to $51.15 on Monday.

Lehman's Q3 earns rise well above expectations
(8:07 AM ET) NEW YORK (CBS.MW) -- Lehman Bros.(LEH: news, chart, profile)reported third-quarter net income of $480 million, or $1.81 a share, up from 70 cents a share in the year-earlier period, and above the average analyst estimate compiled by Reuters Research of $1.35 a share, amid strength in customer flow activity and an improvement in the market cycle. Net revenue rose 74 percent to $2.35 billion, matching analyst forecasts, boosted by a doubling in capital markets revenue and a substantial improvement in revenue from its equities business. The stock closed Monday down 44 cents at $70.21.

http://cbs.marketwatch.com/news/story.as...

  Date       Kirk    S&P500   Delta
2003 YTD    +49.7%   19.2%    30.5%  as of 9/21/2003
 

                                Kirk   S&P500+  NASDAQ 
4.5+ Yrs 12/31/98 to 09/21/03  129.5%  (10.0%) (13.1%)
Annualized Annual Return        19.2%   (2.2%)  (2.9%) 
 
+with dividends reinvested. All Numbers unaudited. 
Click for a free issue of my newsletter .

-- posted by Kirk