Bank Results Won't Be Pretty

The nation's big banks are expected to paint a messy fourth-quarter profit picture over the next two weeks, but investors don't seem to mind.

FleetBoston Financial(FBF Quote - Cramer on FBF - Stock Picks) has warned that its profit will come in below expectations because of a sharp rise in bad loans to the energy and airline industries. Meanwhile, SunTrust(STI Quote - Cramer on STI - Stock Picks), one of the nation's largest regional banks, already has reported a 5% decline in fourth-quarter profit.

Other banks have preannounced big fourth-quarter charges, including J.P. Morgan Chase(JPM Quote - Cramer on JPM - Stock Picks), Bank of New York(BK Quote - Cramer on BK - Stock Picks) and Citigroup(C Quote - Cramer on C - Stock Picks). J.P. Morgan's $400 million pretax charge will effectively leave it with a net loss for the quarter.

Nonetheless, the Philadelphia KBW Bank Index is up 6% this year and up 29% since the market's most recent low-water market in early October. The gains in the bank index have come despite lenders' grim fourth-quarter forecasts and a continuing rise in bad loans to businesses and consumers.

It seems that Wall Street is looking past the fourth-quarter gloom and instead is banking on a strong economic rebound in the second half of the year. Another thing that's given a jolt to many bank stocks is President Bush's proposal to eliminate the tax on corporate dividends.

Bank investors, of course, have witnessed this glass-is-half-full scenario before, only to be disappointed in the end. But this time there's reason to believe the worst may be over for many of the nation's biggest banks, even if it's too early to buy into the bullish predictions of the market's optimists.

"The [loan] losses are becoming more granular and more manageable, and that's giving a little bit of a lift to bank stocks," said David Hendler, a financial-services analyst with CreditSights, a credit-rating service. "But the predictive power of analysts on credit issues is kind of weak."

Ups and Downs Stock performance and dividend yields of major banks
Bank	52-week % Change	Annual Dividend yield
Bank of America	16%	3.5%
Bank One	Unchanged	2
Citigroup	-27	2
Commerce Bank	11	1.5
Comerica	-15	4
FleetBoston	-20	5
J.P. Morgan Chase	-30	5
SunTrust	-5	3
Wachovia	19	2.7
Wells Fargo	11	2.3
Source: Yahoo Finance!

Industry contrarians say that until the economy starts producing more jobs, the nation's lenders will remain vulnerable to a potential rise in loan defaults by consumers and midsize businesses. And that's why Hendler and other bank analysts caution investors to remain wary of lenders with big credit card exposure, such as Citigroup, J.P. Morgan and possibly Bank One(ONE Quote - Cramer on ONE - Stock Picks).

Citigroup and J.P. Morgan also remain vulnerable to litigation claims arising from their roles in providing financing to Enron and WorldCom.

Instead, bank investors would do best to keep their sights focused on a big money-centered bank such as Bank of America(BAC Quote - Cramer on BAC - Stock Picks), which is a smaller player in the credit-card business and proved less vulnerable to corporate loan defaults.

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