Banks Not Benefiting From Fed Rate Largess
Banks may be spending another quarter in the recovery room if recent warnings are an indication of the earnings season ahead.
Despite an aggressive series of
Fed
rate easings and numerous attempted cleanups in recent quarters, some banks are still feeling under the weather. A host of problems, including increasing bad loan levels, weak capital markets and venture capital losses, are weighing on their balance sheets. Now, these second-rate expectations for the second quarter have prompted a number of analysts to cut estimates and adopt a dim view of the sector. Not surprisingly, investor patience with the wait-till-next-quarter theme is growing thin.
"Sell a bank today," advises Sean Ryan, analyst at
Fulcrum Global Partners
, an independent research firm that provides information to hedge funds. Ryan's advice comes in the wake of earnings warnings from financial powerhouses
J.P. Morgan Chase
(JPM) - Get Report
and
Wells Fargo
(WFC) - Get Report
and cautious earnings talk from
Bank One
(ONE) - Get Report
last week.
Easy Money?
"Here we go again -- capital markets and asset quality," reads a recent
UBS Warburg
research note, a reaction to last week's triple dose of bad news. "Given this outlook, we suggest that any investor with a time horizon shorter than 12 months reduce exposure to the bank industry," says Ryan.
The growing sense of frustration is also tied to the fact that banks can't seem to get a grip on the benefits of a 250 basis-point cut in the
fed funds short-term interest rate. "You've got deteriorating credit quality in a period during which the Fed is pumping liquidity into the financial system," says Ryan. The
Philadelphia Stock Exchange/KBW Bank Index
, which measures the performance of the country's 24 largest banks, is down 0.7% this year. "It makes me leery of what the credit picture would look like absent such aggressive action by the Fed," Ryan says.
Nowhere Fast |
|
UBS Warburg says in a report today that nonperforming assets, loans that are past due but haven't been charged off, increased roughly 11% in the fourth and first quarters.
Dimon Baby
Bank One CEO Jamie Dimon disappointed investors in a presentation last week when he said the bank expects to post second-quarter results that look a lot like its first-quarter profit of 58 cents a share. Dimon warned that credit quality has continued to deteriorate at a similar pace with the first quarter. In the first quarter, nonperforming assets rose $92 million to $2.67 billion.
To the bank's credit, Dimon has been straight with investors in recent quarters and has not overpromised on results. The stock has not had any problem keeping up with the average bank valuation, though. Bank One currently trades at 14.7 times 2001 earnings, a notch above the 14.5 times of the KBW Bank Index.
Ryan jokingly compares Dimon's fan base to the earnest believers in
Monty Python's
Life of Brian
, who follow Brian around insisting he is the messiah despite his repeated assertion: "I am not the messiah." "It seems Bank One didn't change their guidance, so much as reiterate that the marketplace continues to have unrealistic expectations," says Ryan, who has a sell rating on the stock. (His firm has no underwriting relationship with Bank One.) Based on its valuation and risks, Ryan calls Bank One "one of the most expensive back stocks around."
UBS Warburg cut earnings estimates on Bank One to 60 cents from 65 cents a share for the second quarter and to $2.55 from $2.70 a share for 2001. "We believe that this again lowering of earnings guidance reflects the fact that Bank One will take even longer to fix than perhaps even Mr. Dimon realized," says Warburg analyst Michael Plodwick in a research note last week. (Plodwick currently has a hold rating on the stock. UBS has underwritten for Bank One in the past three years.)
The Nose Knows
Also stirring up worry were J.P. Morgan Chase and Wells Fargo, which both say venture capital writedowns will weigh on results in the second quarter. Unlike J.P. Morgan, the losses and hefty ensuing charge are at least a first-time event for Wells Fargo. But for J.P. Morgan, the news marks the third time in four quarters that venture capital writedowns will hurt earnings. The consensus analyst earnings estimate for the second quarter is now 67 cents a share, according to
Thomson Financial/First Call
, down from a profit of 95 cents a share a year earlier.
Taken together with other concerns including weak capital markets, the outlook for J.P. Morgan is cause for concern. "We continue to believe that cyclical weakness is more certain and front-ended, whereas the structural pickup from the merger is less certain and back-ended," says
Prudential
banks analyst Mike Mayo. UBS Warburg and
Lehman Brothers
cut second-quarter and full-year estimates on J.P. Morgan.
Ryan, who doesn't have a rating on J.P. Morgan, says, "In the short term
we would have a bias against most bank stocks." Ryan calls the recent spate of preannouncements "unnerving" and adds: "While one would expect some such announcements over the next couple of weeks in the normal course of things, we find these announcements unsettling given the context."