Bank Investors, This Is Going to Hurt

Bank of America's (BAC) sour third-quarter earnings results announced on Monday confirm what may already be obvious for many: Things are getting worse, not better, for banks as the credit crunch passes its one-year anniversary.

Wall Street and the media have been consumed recently, wondering about the ongoing viability of several large banks as investors panicked over the liquidity of financial institutions and overall viability. Beginning next week, with Wells Fargo (WFC) and JPMorgan Chase (JPM) on Wednesday, banks will reveal just how bad earnings for the sector were in the third quarter.

Last month, Lehman Brothers filed for bankruptcy while Washington Mutual was seized by regulators. Just last week, Wachovia (WB) teetered on the brink of failure, before the Federal Deposit Insurance Corp. brokered a deal with Citigroup (C).

Large multinational banks have been scooping up their departed rivals' remains. JPMorgan Chase agreed to purchase WaMu, Barclays (BCS) and Nomura purchased portions of Lehman, while Citi and Wells Fargo, who trumped Citi's $2.16 billion deal with a $15.1 billion offer later in the week, remain in a legal battle for Wachovia.

The collapse of several large banks exemplifies just how dire the situation has become for the sector, amid an increasingly dour economic environment. Analysts at Fox-Pitt Kelton Cochran Caronia Waller estimate that overall earnings for the bank sector will fall 28% compared to a year earlier.

"While the fundamental outlook for most banks remains negative due to falling real estate prices, limited balance sheet growth and funding pressures, the stocks are likely to trade more on technical factors, including the perceived benefit of [the federal bailout legislation] and the removal of the short-sale ban," the analysts wrote in an industry note Tuesday.