CITIGROUP AND Bank of America, two of the biggest victims of the financial crisis, have failed to dispel investor fears over their future after reporting second-quarter profits that were boosted by large one-off gains.

The lenders, which have been bailed out by US taxpayers and are under close regulatory scrutiny, continued to suffer from consumers’ financial woes and did worse than rivals such as Goldman Sachs and JPMorgan Chase in investment banking.

Citi, which is about to cede a 34 per cent stake to the US government, reported a $4.3 billion profit compared with a $2.5 billion loss a year ago. Earnings were boosted by a $6.7 billion gain from the partial sale of Smith Barney, Citi’s brokerage business, to Morgan Stanley. Without the gain, Citi would have been deep in the red and recording its sixth loss-making period in the last seven quarters.

The poor financial health of US consumers continued to weigh on both Citi and Bank of America as losses in their credit card, mortgages and other retail lending businesses continued to mount.

Citi incurred credit costs of $12.4 billion during the quarter, including $3.9 billion set aside to cover future loan losses. Bank of America had credit costs of $16.4 billion in the three months to June.

Bank of America managed to produce second-quarter earnings of $3.2 billion thanks to one-time gains, but its profits declined both from the previous quarter and a year ago. The Charlotte-based bank recorded a $5.3 billion gain from its sale of a stake in China Construction Bank during the quarter, and another $3.8 billion gain on the sale of its share of a merchants payment company.

Excluding those gains, BofA would have reported a loss for the quarter. – Copyright The Financial Times Limited 2009