As banks prepare to report fourth-quarter earnings starting Tuesday, no one expects to see much growth.
That is both bad and good for bank stocks. On the one hand, earnings are likely to be anemic across the sector; plenty of banks have already warned of weak results, following months of declining capital markets, deteriorating credit quality and tighter profit margins. On the other hand, given the dismal mood in the sector, any upside surprise could spark a rally in a given stock. Depending on developments in the macroeconomic picture, the sector could even rise a bit if enough numbers come in clean, analysts say.
But for now, everyone's mum on the subject of optimism. Diane Glossman, banks analyst at
, dubs her fourth-quarter outlook "Expect Disappointment." She expects bank earnings to slide 1.8% from a year ago as a result of rising credit costs and a slowing economy.
Some big banks will suffer greatly this quarter. For instance, the newly merged
J.P. Morgan Chase
, which has already
warned of a shortfall, is expected to see combined earnings drop at least 50% because of "venture capital losses and reduction in trading volume," she says. (UBS Warburg rates J.P. Morgan a buy and hasn't underwritten for the bank.)
Meanwhile, among other money center banks (those in a major financial center that participate in both national and international money markets), earnings at powerhouse
are seen rising 14%, while
Bank of New York
is projected to report a 15% gain. (UBS rates Citi strong buy and Bank of New York buy. It hasn't underwritten for either bank.)
"I think the bias is so much more toward expecting disappointments rather than upside surprises," says Brock Vandervliet, banks analyst at
. "Many of the companies I was concerned about have already prereleased, so that takes some of the drama out." Lehman's fourth-quarter outlook includes a universe of 54 banks. It expects 13 banks to beat expectations, 26 to post in-line results and 15 to miss the consensus.
Indeed, the list of financials that have warned is fairly lengthy this quarter, including
Bank of America
, J.P. Morgan Chase,
Some analysts say they expect few surprises, given that most large banks have either expressed comfort with estimates or faced up to the fact they won't meet them. But Ruchi Madan, banks analyst at
Salomon Smith Barney
, singles out possible wild cards, including
, which she said in a research report is "widely expected to miss fourth-quarter estimates as a result of a potential credit cleanup."
And Madan believes
needs to talk down estimates, though time is running short, with the bank due to report earnings Thursday morning. Salomon rates Wachovia neutral and Bank One outperform and has had underwriting relationships with both banks in the past.
Of the many issues banks are grappling with at the moment, credit quality has taken center stage as bankruptcies and troubled loans have increased amid a slowing economy and higher interest rates.
Bank of America's credit problems have been the most visible recently, but many observers are wondering how widespread the problem will be. Glossman says she expects nonperforming loans (past-due loans that haven't been written off) to increase 11% on average for superregionals, or banks that operate in more than one state.
On a more positive note,
set a positive tone on
Wednesday when it said nonperformers had increased a modest 6%, compared with a frightening 60% spike in the previous quarter.
Some analysts believe things will get better from here. Madan thinks the downside in bank stocks is mostly done, opining that higher credit costs have already been priced into the stocks and that cost savings from acquisitions and restructuring should help the bottom line. And the
recent interest rate cut, while certainly not a cure-all for banks, should help at least reduce margin pressure in the months ahead.