A Lehman analyst on Thursday slashed his estimates for the banking sector for the third quarter in a row, but found some reason for optimism in the battered sector.
As the market gears up for earnings season, Jason Goldberg brought his 2008 estimates down 7% across the board and trimmed his 2009 numbers by 4%. Although he thinks the consensus is going overboard in forecasts for a dire first quarter for banks, he concedes that higher loan-loss provisions, lower net interest margin and markdowns on packaged debt like collateralized debt obligations, or CDOs, and asset-backed securities will bring banks down.
In a report released on Thursday, Goldberg notes that
Citigroup(C Quote - Cramer on C - Stock Picks) and
JPMorgan Chase(JPM Quote - Cramer on JPM - Stock Picks) are his favorites for near-term performance, citing improved liquidity situations, although his charts reflect that Citi has one of the lowest capital ratios and the largest subprime exposure. Goldberg slashed his first quarter earnings estimate for Citibank to a loss of 50 cents a share from $1.50-a-share profit. JPMorgan's first quarter was only clipped by 12 cents with the previous estimate being 87 cents and going down to 75 cents.
More Bad News for the Financials |
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He is concerned about banks that are overexposed to residential construction spending and are asset sensitive, such as
Zion Bank (ZION Quote - Cramer on ZION - Stock Picks),
Synovus Financial (SNV Quote - Cramer on SNV - Stock Picks),
Comerica (CMA Quote - Cramer on CMA - Stock Picks),
Marshal & Ilsley (MI Quote - Cramer on MI - Stock Picks) and
Regions Financial (RF Quote - Cramer on RF - Stock Picks). He points out that land acquisition loans and development deals will cause a great amount of stress on these banks.
But it wasn't all bad news from the analyst, as he took a look back at challenging cycles in the past. He points out that in the first quarter of 1991 and the third quarter of 2000, bank stocks began to outperform three to five quarters before loan losses peaked.
"It's also worth noting that the beginning of the outperformance was coincident with the
[Federal Reserve] becoming more aggressive, the onset of a recession, and the group hitting a 50% relative price/book, all conditions which we believe are currently met," Goldberg writes.
He is also forecasting dividend increases, suggesting investors keep an eye on JPMorgan, which announced a dividend increase last year with its first-quarter earnings release. Goldberg expects
BB&T (BBT Quote - Cramer on BBT - Stock Picks),
PNC Financial (PNC Quote - Cramer on PNC - Stock Picks) and Marshall & Ilsley all to register dividend increases, possibly in the second quarter, as they have done so in the past.
Goldberg continues to be biased toward large-cap banks as opposed to mid-cap. His sector rating is positive and only four stocks out of 16 in his banking universe are rated underweight.
The KBW Bank Index recently was down 2.2% to 80.85.
Debra Borchardt
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