Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What to Expect From Bank Earnings


The major banks begin reporting later in the week, but thanks to the Federal Reserve's weekly H-8 data, we already have a pretty good sense of the net profitability of the industry.

The major banks begin reporting later in the week starting with JPMorgan (JPM) on Friday and continuing the following week with Citigroup (C), Bank of New York Mellon (BK), Wells Fargo (WFC), Goldman Sachs (GS) and Bank of America (BAC). But thanks to the Federal Reserve's weekly H-8 data, we already have a pretty good sense of the net profitability of the industry.

To believe the net residual figures in the Fed data (a proxy for capital) capital levels for the banking industry did not increase in the quarter. Or put differently, in aggregate, profits did not cover dividends paid out.

Looking at the business line and balance sheet composition of the largest banks, that should not come as a surprise. The biggest banks have the greatest exposures to the ongoing credit and litigation challenges of the housing industry. And trading revenues have been hurt by market volatility and increasing risk aversion by both investors and capital markets participants overall.

Then there was the systemic flood of liquidity during the fourth quarter, as global corporations and financial institutions moved out of money market funds and European banks into US deposits. With lackluster loan growth, except in holiday-related credit card balances and commercial banking, large financial institutions had few places to put their surplus liquidity but into their investment portfolios.

At the end of the third quarter, the Federal Deposit Insurance Corp. reported that one-third of bank balance sheets were already in zero risk-weighted securities (largely US Treasuries and Treasury-related instruments), and I expect when the fourth-quarter Quarterly Banking Profile data is released in a few weeks, that figure will be closer to 37% or even 40%.

Needless to say, though, with deposit rates already at near zero and returns on US Treasuries meager, the impact on net interest margins was brutal in the fourth quarter.

If there was good news in the fourth quarter, it was on the credit front. Overall loan loss provisions fell -- suggesting no incremental provision requirements, if not outright releases of provisions during the quarter -- and I expect that year-end loan loss and delinquency statistics will show modest improvement both quarter on quarter and year on year.

On the expense front, I suspect that banks will be challenged to show how their compensation and operating costs have been reconciled to the new no-growth/low-earnings environment, and as a result, I expect that as part of their earnings releases, firms will both emphasize their cuts in year-end bonus payments wherever possible and many will announce new cost-cutting initiatives. Until loan demand picks up and capital markets revenues improve, banks will be under increasing pressure from analysts and shareholders to reconcile their current expense base to our deleveraging and risk adverse new normal world.

Admittedly the lack of any additional really bad news may be seen as good news for the banks, particularly as most investors see Europe "contained" to just a handful of too-big-to-fail US banks. Although I suspect that the Securities and Exchange Commission's recent call for greater disclosure regarding US banks' exposure to Europe may raise more, not fewer, questions among investors.

As I look ahead to this earnings season, my focus will be on organic growth prospects (as distinct from purchases of distressed loan assets out of Europe) and any potential "second derivative" exposures to Europe that suggest that current credit concerns are not "contained." To me, both of these issues may set the tone for investor/analyst reactions.

All that said, though, it is truly remarkable to think that almost three years out from the March 2009 market bottom, the "V," which then went to "U"-shaped as far as earnings are concerned, has now clearly become "L."

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
Position in SH and JPM
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos