Three years after being doomed by Wall Street, the two banks continue to defy expectations, writes NELSON SCHWARTZ

BANK OF America used to be the stock Wall Street loved to hate. Citigroup, on the other hand, was supposed to be the troubled bank that had finally got its act together. Those roles have been reversed this year, however, and with the bank earnings season set to start later this week, investors will be closely watching to see how the two banks match up.

The two have lots in common. Both were forced to turn to the government for help in the wake of the 2008 financial crisis, and both chief executives have spent much of their tenure cleaning up the messes they inherited.

Both companies have also had to issue significant amounts of new stock to raise capital that solidified their balance sheets but left their shares at a fraction of pre-crisis highs.

Citigroup and Bank of America also risk a credit downgrade by the ratings agency Moody’s Investors Service in mid-May.

Until last month, it seemed that Citigroup was recovering more quickly. But when the Federal Reserve blocked the company’s proposal to buy back stock and increase its dividend after last month’s stress tests, investors were left wondering if they had bet on the wrong horse.

Bank of America passed all of its stress tests this time – after its own inability in 2011 to deliver a dividend increase that investors were hoping for – and opted to continue to build capital for the rest of 2012.

Bank of America shares are up 66 per cent this year, while Citigroup has risen 33 per cent, amid the broader rebound in financial stocks.

After staying out of the spotlight and earning $21 billion over the last two years, Citigroup's potential problems are gaining attention again. "Citigroup is the New Bank of America," TheStreet.comsaid when the stress test results were made public in March.

Vikram Pandit, the Citigroup chief executive, and other top officials may still increase the company’s dividend, albeit in the fourth quarter and for less than they initially proposed.

Brian Moynihan, the chief executive of Bank of America, has made it clear that increasing capital levels and shedding non-core assets, rather than returning capital to investors, are the order of the day for now.

At Barclays Capital, the analyst Jason Goldberg said he was shocked when Citigroup did not get the go-ahead from the Fed, adding, “We had run mock stress tests with Citi passing by a fair amount.” Just as surprising, he added, has been Bank of America’s surge.

Its performance has been a far cry from last year, when Bank of America’s stock, which is now trading above $9 (€6.87), was flirting with $5 (€3.81), and questions about whether it had enough capital were mounting.

“If you asked me in January whether this thing would be up 66 per cent, I’d have said you’re crazy,” Goldberg said, of Bank of America’s stock performance this year. “They’ve played some catch-up.”

But as the focus shifts to earnings this week, Wall Street has been getting more optimistic about Citigroup. Last week, Goldberg sharply increased his estimate for Citigroup’s quarterly earnings to $1.30 (€1) a share, from 97 cent a share, thanks to one-time asset sales as well as better-performing capital markets that could raise trading revenue.

He kept his Bank of America estimate flat at nine cents a share for the first quarter.

The first indication of how big banks performed in the first quarter will come on Friday, when two of the stronger companies in the sector, JPMorgan Chase and Wells Fargo, announce their latest results. Citigroup reports on Monday, with Bank of America disclosing earnings on April 19th.

“Bank of America will get better if housing gets better,” said David Ellison, a mutual fund manager for FBR who owns stock in both banks. “Citigroup’s business is more commercial and will benefit if consumer credit improves.”

The bottom line, Ellison said, is that just three years after being written off by Wall Street, “both banks are going to survive and make money; the world isn’t coming to an end”. – (New York Times service)