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Profit Drop at U.S. Banks Imperils Rally
The six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., may post an 11 percent drop in first-quarter profit, threatening a rally that pushed bank stocks 19 percent higher this year.
The banks will post $15.3 billion in net income when adjusted for one-time items, down from $17.3 billion in last year’s first quarter, according to a Bloomberg survey of analysts. Trading revenue at the biggest lenders is projected to fall 23 percent to $18.3 billion, according to Morgan Stanley analysts, who didn’t include their firm or Wells Fargo.
“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry. There is a little too much optimism going into this quarter.”
U.S. lenders, struggling to expand in commercial banking years after the housing collapse, haven’t matched last year’s overall results, even as bond and equity markets strengthened. Making matters worse, loan balances increased less than the economy, bucking a trend in previous recoveries, said Brian Foran, a New York-based analyst at Nomura Holdings Inc.
Loans at the top 25 domestically chartered commercial banks rose 0.4 percent in the quarter through March 28, slowing from 1 percent growth in the previous three months, according to the Federal Reserve. Loans fell to $4.04 trillion from a peak of $4.24 trillion in the fourth quarter of 2008, according to the Fed. The U.S. economy expanded 2 percent in the first quarter, according to estimates from 72 economists surveyed by Bloomberg.
“There will be times in this cycle, like this quarter, when GDP growth and loan growth don’t necessarily track each other,” Foran said in an interview. “It’s a complete reversal of the fourth quarter, when capital markets were weak and loan growth was strong.”
The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy, he said.
The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first quarter, led by Bank of America Corp.’s 72 percent gain and Regions Financial Corp.’s 53 percent. Financial services topped all sectors in the Standard & Poor’s 500 Index. (SPX)
Over the past five trading days ending yesterday, the KBW Index fell 6.4 percent. That may mean fewer investors sell shares if first-quarter results disappoint, Kovalski said.
The gauge rose 2.1 percent today in New York trading, led by Bank of America, up 3.8 percent, and KeyCorp, with a gain of 3.4 percent. JPMorgan rose 2.4 percent.
Still, lenders are cheaper than they were last year, as measured by the ratios of their stock prices to earnings estimates over the next 12 months and to book values. The price- to-earnings ratio for the KBW Index was 10.8 as of yesterday, down from 13.7 on April 11, 2011. The ratio of price to tangible book value, a measure of what investors are willing to pay for a company’s equity after removing intangible items such as goodwill, stood at 1.22 compared with 1.53 a year earlier.
Investors will get a first look at results when JPMorgan and Wells Fargo (WFC) kick off earnings, about an hour apart, on April 13. Citigroup Inc. (C) is set to announce results April 16, followed by Goldman Sachs Group Inc. (GS), Bank of America and Morgan Stanley.
JPMorgan, the largest and most profitable U.S. lender, may say net income fell 19 percent, adjusting for one-time items, from the same period a year earlier to $4.53 billion, according to the average estimate of 19 analysts surveyed by Bloomberg. Earnings per share will fall to $1.18, the analysts estimate. Revenue at the New York-based bank is projected to fall 4.1 percent to $24.2 billion.
Profit at San Francisco-based Wells Fargo, the most valuable U.S. bank and biggest home lender, is estimated to climb 7.8 percent to $3.85 billion, analysts estimate. Revenue probably was little changed at about $20.4 billion.
Bank of America, second by assets to JPMorgan and based in Charlotte, North Carolina, may post $1.73 billion in adjusted earnings, about 1 percent less than the year-earlier period, according to the Bloomberg survey. Citigroup may report a 7 percent gain in adjusted profit to $3.21 billion. Goldman Sachs’s net income is projected to fall 29 percent to $1.81 billion. Citigroup and Goldman Sachs are based in New York.
For those banks with the largest capital-markets operations, the bond markets provided one bright spot.
Underwriters sold more than $628 billion in U.S. corporate debt in the first quarter, increasing from less than $561 billion in the prior year’s first three months, according to data compiled by Bloomberg. JPMorgan ranked first, selling $79.7 billion, and Citigroup came in second with $62.2 billion. Wells Fargo was 10th, with $25.5 billion in sales. Wells Fargo, whose 12-month stock performance has outpaced its largest peers, depends the least on capital markets for profit.
While trading probably fell short of last year, analysts estimate it jumped from the fourth quarter. Revenue in the fixed-income, currencies and commodities-trading divisions at Bank of America, Citigroup, JPMorgan and Goldman Sachs probably totaled $14.3 billion in the first quarter, Betsy Graseck, a Morgan Stanley (MS) analyst, estimated in an April 3 report. That would be an 18 percent decline from the $17.5 billion generated a year earlier and more than double the fourth quarter, when it slumped to $6.9 billion, Graseck wrote.
Equity-trading revenue may have fallen 34 percent to $4 billion and fees from underwriting equities may have dropped 18 percent to $1.15 billion over the prior year, according to the estimates. Revenue from mergers and acquisitions advice may have declined 30 percent.
Trading got a lift from rising asset prices with those banks bringing the largest inventories into the quarter likely doing the best, according to Charles Peabody, an analyst at Portales Partners LLC in New York. U.S. investment-grade and high-yield corporate debt rose 3 percent in the first quarter, according to Bank of America Merrill Lynch Index data.
“We’ve gotten more defensive in the last several weeks,” Peabody said in a phone interview. “Fee income will be pretty strong given fixed-income results and asset appreciation. By contrast, we think top-line and the basic banking business will be disappointing.”
Peabody said bank stocks could fall 20 percent to 30 percent from their recent highs.
Net Interest Margins
Central bankers aren’t helping. Fed officials affirmed their projection, first announced in January, that subdued inflation and economic slack probably will warrant low rates through late 2014, according to minutes of the March policy meeting released this month. That cuts into net interest margins, the difference between what banks earn on loans and what they pay for funds. At the four largest U.S. banks by assets, margins dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.
“It will be a while until the industry gets back to its optimal returns,” said Kovalski of Alpine Woods Capital Advisors. “We had a lot of underweighted portfolios quickly increasing their allocation to the sector. Now the question is will they hold it there, or will they get antsy that the group isn’t generating the quick turnaround that was expected?”
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