Bank Earnings: A Foggy Second QuarterAaron Pressman
As the U.S. banking sector stands poised to announce second-quarter earnings over the next few weeks, investors are preparing for a slew of convoluted reports filled with losses and gains from supposedly one-time events.
Analysts don't expect the market's reception will be as positive as it was after first-quarter results came in better than expected, prompting a rally in the sector. The SPDR KBW Bank Exchange-Traded Fund (KBE) is up 38% since the end of March.
What should market players expect from the second-quarter releases? In addition to focusing on banks' credit losses and impairment charges, investors and analysts will also have to sort through the impact of several government programs and various capital-raising strategies banks used in the quarter.
"Earnings this quarter are going to be clouded by all kinds of things," says Derek Ferber, an analyst at research firm SNL Financial. "It's going to be more difficult than ever to navigate the reports and find the true core earnings."
commercial lending losses mount
The Federal Deposit Insurance Corp., for example, announced on May 22 the terms of a "special assessment" fee based on banks' balance sheets as of June 30. Banks are expected to reduce second-quarter earnings by an amount equal to that fee even though it won't be collected until Sept. 30. And many banks issued new shares, cut dividends, converted preferred shares to common, or bought back debt at a discount during the quarter.
Amid the confusion, few analysts expect the industry's basic problem—credit losses—to improve much soon. "It's really a repeat of what we've seen for the last two years," says Morningstar (MORN) analyst Jamie Peters. Even if losses on home mortgages stabilize a bit, losses from commercial lending, particularly for large real estate projects, are still growing, she said.
Still, investors got a dollop of good news on July 13 when Meredith Whitney, the long-time bearish industry analyst who now runs her own firm, said she was upgrading Goldman Sachs (GS) to a buy rating from her previous neutral stance. The investment bank's earnings should get a boost from strong securities underwriting and trading activity in the second quarter, Whitney said.
Shares of Goldman gained 5% on July 13 while shares of large banks active on Wall Street rose, too. JPMorgan Chase (JPM) gained 7% , Bank of America (BAC) added 9%, and Citigroup (C) rose 7%.
a crazy quilt of episodic charges
Goldman reports its earnings on July 14, with analysts predicting earnings of $3.65 per share on average, with Whitney now forecasting $4.65. Analysts expect a loss of 32¢ a share from Citigroup, which reports on July 17. JPMorgan Chase is expected to show profit of 6¢ a share on July 16 and Bank of America 11¢ on July 17.
The crazy quilt of potential one-time (or at least infrequent) charges will make it tougher than ever for investors to make sense of the earnings reports. Wall Street analysts have already been issuing corrections and modifications to their earnings forecasts.
On July 13, Barclays Capital (BCS) analyst Jason Goldberg lowered his forecast for Citigroup to a loss of 25¢ a share, from an earlier 15¢ loss prediction, because of the FDIC special assessment fee. JPMorgan will report only 10¢ of profit, versus an earlier forecast of 40¢, he said, because of the FDIC fee, as well as the cost of repaying money to the government's Troubled Asset Relief Program (TARP).
Elsewhere, Credit Suisse (CS) analysts lowered their forecast for SunTrust Banks (STI), in part because of a huge equity issuance that will dilute profits per share. And Zions Bancorp (ZION) may report a profit of $1.79 a share instead of a net loss of 96¢ because of a laundry list of gains from repurchasing preferred shares, terminating a swap, and modifying the terms of some of its debt, the analysts said.
Investors can only hope that the day will come when such old-fashioned numbers as net interest margin and loan volumes will once again be the main features of bank earnings reports. But that day may not come soon.