Bank of America, Citigroup miss investor expectations as the banks' trading struggles

The final months of 2014 were more difficult for big banks than investors suspected.

Bank of America and Citigroup reported disappointing results Thursday, hit by lower trading revenues and more legal expenses. That followed JPMorgan's weaker earnings announced the day before. Shares of all three banks on Thursday fell 3 percent or more, a bigger decline than the stock market overall.

Like JPMorgan Chase, Citigroup and Bank of America saw drops in their fixed-income trading revenue as client trading activity slowed. Citi said revenue in that part of its business fell to $2 billion in the period, a drop of 16 percent from a year earlier. BofA's fixed-income trading revenue fell to $1.5 billion from $1.9 billion a year earlier.

The drops have perplexed investors and analysts alike. For the last few years, the bond and stock markets remained quiet and kept investors from having to trade heavily. It was thought the volatility in the last three months of the year, with big swings in stocks in October and December, would give banks an opportunity to boost their trading businesses. Typically, high volatility means people trade more, but that's not how it played out.

"The results definitely left investors with frustration and disappointment," said Shannon Stemm, senior financial services analyst at Edward Jones.

Legal costs have also weighed on the banks. Citigroup warned investors that it would incur charges of $3.5 billion for the fourth quarter to cover the costs of investigations into currency trading, the manipulation of a key interest rate, and anti-money laundering probes. JPMorgan disclosed $990 million in after-tax legal expenses related to its own foreign currency probes. BofA did not have big legal expenses this quarter, but it did in 2013, leaving expenses difficult for investors to predict.

For the fourth quarter, Bank of America announced profit of $3.05 billion, or 25 cents a share, down from $3.44 billion, or 29 cents a share, a year earlier. Total revenue at Bank of America fell 12.6 percent to $18.96 billion. The Charlotte, North Carolina, bank reported one-time items that lowered its earnings by 7 cents a share. Those items were tied to the valuation of the bank's debt and other underlying securities.

The results fell short of estimates, with analysts surveyed by FactSet expecting earnings of 31 cents a share on revenue of $21.08 billion.

Meanwhile, Citigroup had a quarterly profit of $350 million, or 6 cents a share, compared with $2.5 billion, or 77 cents a share, a year earlier. Revenue was flat at $17.78 billion.

Citi's earnings fell short of analysts' estimates of 10 cents a share, according to FactSet.

One bank that did hold up well was Wells Fargo, whose earnings rose slightly last quarter. However, Wells Fargo's business is primarily in consumer banking, most notably mortgages.

Investors will get Goldman Sachs' results Friday. Goldman is considered the strongest of Wall Street's trading houses and doesn't have a consumer banking business. If Goldman also shows trading weakness, it'll be a sign the problems last quarter were not just limited to the banking conglomerates.