Analysts’ failure to foresee declining earnings per share for the biggest U.S. banks last year hasn’t stopped them from predicting an even bigger profit surge for 2012.
The six largest lenders, including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS), may post an average profit increase of 57 percent this year, according to 184 analysts’ estimates compiled by Bloomberg. A year ago, analysts predicted profit at the banks would climb 32 percent in 2011. Instead, earnings per share probably fell 18 percent as the economic recovery analysts counted on never took hold.
Improved trading results, more investment-banking deals, expense-cutting measures and lower credit costs will lead to the increase in earnings that didn’t materialize last year, analysts say. That may provide a boost to stock prices after financials were the worst-performing industry in the U.S. in 2011.
“The banks could get some positive operating leverage in 2012 from trading normalizing and expenses normalizing,” said Chris Kotowski, an Oppenheimer & Co. analyst in New York who estimates at least an 18 percent earnings-per-share increase for each of the six banks. “It’s not like all the news on the banks was uniformly bad all the time. The market had a bigger freakout than the companies did.”
‘More Optimistic View’
Banks’ trading results were decimated as Europe’s sovereign-debt crisis deepened, protests helped topple governments in the Middle East and Africa, and an earthquake and tsunami in Japan triggered a nuclear meltdown. The U.S. economy, measured by gross domestic product, probably expanded 1.8 percent last year, according to economists’ estimates compiled by Bloomberg, instead of the 3.1 percent predicted a year ago.
“Everyone had a much more optimistic view of the economy,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and an analyst with FBR Capital Markets Corp. in Arlington, Virginia. “The banks need GDP growth to grow loans. We all thought there would be loan growth, and Europe didn’t help anybody.”
Bank stocks fell along with earnings last year and were the worst performers among 10 industries tracked within the Standard & Poor’s 500 Index. Financials dropped 18.4 percent, led by a 58 percent plunge for Bank of America. Goldman Sachs dropped 46 percent, while New York-based Citigroup Inc. (C) and Morgan Stanley (MS) both declined 44 percent. JPMorgan, the largest U.S. bank by assets, was down 22 percent and Wells Fargo & Co. (WFC) 11 percent. The broader S&P 500 Index was unchanged for the year.
Global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg. Fixed-income trading likely dropped 27 percent and equities revenue 3 percent at the 10 biggest investment banks, according to industry consultant Coalition Ltd.
Goldman, Morgan Stanley
The increase in 2012 earnings will be led by Morgan Stanley and Goldman Sachs, which are most reliant on trading and investment-banking revenue, analysts estimate. They predict the New York-based firms will more than double earnings per share in 2012, after missing 2011 targets by the most of the six banks.
Revenue from trading and investment banking may rise about 8.5 percent for the industry, according to Kian Abouhossein, a London-based analyst at JPMorgan. That may help reverse a two- year slide in overall revenue as those areas account for about a quarter of total revenue at the five biggest Wall Street banks.
Any revenue growth may boost the profitability of banks as they also seek to reduce expenses. Bank of America said last year it would chop $5 billion in annual costs, and Morgan Stanley and Goldman Sachs have targeted at least $1 billion. All three firms say they will eliminate positions, part of a wave of more than 230,000 job cuts announced by financial companies worldwide last year.
“The earnings ramp-up is a return to some kind of normalcy in trading activities and deal flow, as well as tighter control on expenses,” said Fred Cannon, an analyst at KBW Inc. in New York. “It would be kind of depressing to forecast financial- market activity in 2012 as being like it was in 2011.”
Banks may also benefit for a third consecutive year from improving credit quality, according to Andrew Marquardt, an analyst at Evercore Partners Inc. (EVR) in New York. Net write-offs and loan-loss reserves will approach “normalized” levels in 2012, Marquardt estimated in a Jan. 2 note. A decrease in reserves accounts for all of the expected 25 percent increase in earnings per share at Bank of America, he wrote.
While analysts see a bigger percentage jump in earnings for 2012, they aren’t as optimistic as they were a year ago. The combined $27.84 per share the big banks are expected to earn this year is less than the $34.21 analysts predicted they would produce in 2011 and up from 2010 as the European debt crisis may hurt results.
“I expect more of the same,” Miller said. “Bank valuations could improve, but it’s going to be very slow loan growth, if any at all. Earnings will remain under pressure.”
Jason Goldberg, an analyst at Barclays Plc in New York, wrote in a note yesterday that loan growth probably will accelerate in 2012. Loans at the four largest U.S. banks, net of loan-loss allowances, increased 0.3 percent in the nine months ended Sept. 30, company filings show. That compared with consensus estimates of 2 percent growth at the big banks, Brian Foran, an analyst at Nomura Holdings Inc., wrote in March.
“The risk of not owning U.S. bank stocks is greater than owning them,” wrote Goldberg, who projects an aggregate 21 percent increase in earnings per share for JPMorgan, Bank of America, Citigroup and San Francisco-based Wells Fargo. “Headwinds from 2011 should subside in 2012.”
Bank of America
Bank of America, which was the biggest decliner of 2011 in the Dow Jones Industrial Average and KBW Bank Index (BKX), has been hurt by rising costs tied to faulty mortgages. The Charlotte, North Carolina-based lender, led by Chief Executive Officer Brian T. Moynihan, 52, has said it plans to eliminate 30,000 jobs in the next few years.
Bank of America’s 2011 earnings estimates were chopped 54 percent as the lender, the second-biggest in the U.S. by assets, spent more than $10 billion to settle soured-mortgage claims with bond insurers and private-label investors. Morgan Stanley may fall short of 2011 estimates by 72 percent and Goldman Sachs may miss by 69 percent. Estimates for Wells Fargo rose 1 cent, the only increase.
“What has been the biggest pressure is this drop-off in capital-markets activity, and also the inability of BofA to get its mortgage issues behind it,” KBW’s Cannon said.
Even with a projected earnings increase and low valuations, investors should be “cautious” on financials because of uncertainty about Europe, Joseph Tanious, a market strategist at JPMorgan Asset Management in New York, said Dec. 29 on Bloomberg Television’s “In the Loop.”
“If you look at where valuations are right now in financials, it’s hard to ignore them,” Tanious said. “They are very, very attractive. But if we talk specifically about 2012, which we think will be another volatile year, financials, as they performed this year, may in fact lag the broad market.”
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