Bank stocks have charted a volatile path this week, spurred by the
disappointing rate cut and surprising liquidity injection, along with several earnings warnings and analyst downgrades.
Wednesday was filled with a myriad of warnings from
Bank of America
, disclosing that as a result of the worsening credit conditions, fourth-quarter earnings were likely to disappoint the Street.
Speculation also heated up that
-- fresh off the heels of announcing Vikram Pandit as its new CEO on Tuesday -- and
were considering employee layoffs as part of cost-cutting measures.
The sector also got several downgrades from analysts who are turning more cautious as they look to earnings prospects for next year.
"We're in a bottoming process for a correction and for financials specifically," says Tim Ghriskey, the chief investment officer of Solaris Asset Management. "That process can take a while, especially given the extent of the crisis and the fact that the credit crisis is going to impact financials, or the banks primarily, for some time. Having said that, we think we've probably seen about the lows in financials."
Solaris, which has more than $1 billion in assets under management, has been very selective in which stocks it owns in the financial sector, Ghriskey says. It has avoided most of the largest U.S. banks and brokers, with the exception of
, he says.
"We're not ready to say the low has been established ...
but we don't see significant further downside in the financials at this point," Ghriskey says. "Stocks price in the future and we believe they priced in recessionary scenarios already."
The KBW Bank Index -- a measure of the 50 largest banks in the U.S. -- was up 2.7% ahead of Tuesday's Federal Open Market Committee meeting, lost more than 5% at the close of trading Tuesday then rose as much as 2.7% early on Wednesday, but then dropped more than 2% in the afternoon. The index is down more than 20% this year.
The Amex Securities Broker-Dealer Index -- down roughly 14% this year -- rose as much as 3.8% on Wednesday, but also retreated in the afternoon.
Early Wednesday, the Fed said it would join forces with other Western central banks to get fresh cash circulating around the world in a bid to lift the credit markets out of their funk.
To start, the Fed is planning to lend out at least $40 billion in four auctions that will begin in the next few days. Banks will still be allowed to use the same collateral they currently put up.
The European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank are also taking part in the proposal. Additionally, the Fed has set up a $20 billion swap line with the ECB and a $4 billion line with the Swiss bank.
The move comes less than 24 hours after the Fed cut the fed funds rate in its December meeting by a quarter percentage point to 4.25%. The discount rate, the rate at which banks can borrow from the Fed, was taken down to 4.75%.
Ghriskey says the upcoming brokerage earnings, which kicks off on Thursday by
, plus additional warnings by banks before the majority report in January, are worrisome.
The brokerage earnings are likely to be "uglier than some people expect," while bank earnings are "probably going to be worse than expectations," he says.
BofA shares were falling 3% on Wednesday after the company's CEO said writedowns will worsen and fourth-quarter earnings will likely be "quite disappointing."
Windfall of Writedowns
Speaking at the Goldman Sachs Investor Conference, BofA Chairman and CEO Kenneth Lewis said its writedowns for collateralized debt obligations will be larger than already reported, "although obviously we won't know our final numbers until we close the fourth quarter."
Last month, the company estimated pretax CDO writedowns of $3 billion.
His remarks were reported in a document filed with the
Securities and Exchange Commission
"While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing," he said. "At this point, the final writedowns of CDOs are unknowable, but we expect to be profitable in the fourth quarter."
The company currently expects loan-loss provision expenses of around $3.3 billion in the fourth quarter, indicating increased reserves of about $1.3 billion.
"The financial services industry today faces its greatest challenges in decades," Lewis said. "In the short term, we at Bank of America are intensely focused on managing through the current market turbulence, which we think will extend into 2008."
Shares of Wachovia were falling 3.5% on Wednesday after the company disclosed at the Goldman conference that its loan-loss provision in the fourth quarter could be double what it had foreseen.
Previously, Wachovia said that because of anticipated loan growth and the continuing credit deterioration in its loan portfolio, it expected to record a loan-loss provision in the fourth quarter of $500 million to $600 million in excess of charge-offs for the quarter.
Now, it believes its loan-loss provision will be about $1 billion in excess of charge-offs for the fourth quarter.
Ed Najarian, an analyst at Merrill Lynch, cut his ratings on BofA and Wachovia as a result of the disclosures. He predicts that BofA will need to write down its subprime CDO exposure by "at least another $2 billion in 2008," he writes in a note where he lowered his rating on the company to a neutral.
BofA will also have higher-than-expected credit losses and disappointing results from its Global Corporate & Investment Bank "based on much lower revenue from structured products, commercial mortgage-backed securities, leveraged lending, M&A and private equity," Najarian writes.
He downgraded Wachovia to a sell.
The company's net credit losses will rise "significantly" next year, among other things, Najarian writes in a separate note. He blames the "rapidly deteriorating non-conforming mortgage exposure" it has in California from its purchase of Golden West as well as "much higher home equity and subprime auto loan losses."
Merrill analyst Guy Moszkowski cut JPMorgan Chase to a neutral.
The company has managed extremely well through credit debacle to date and we expect it to emerge a winner from the current malaise," Moszkowski writes. "However, it remains one of the largest U.S. consumer lenders, with material exposure to credit card, home equity, and corporate credit quality. In Merrill Lynch's macro expectation of
a 2008 consumer recession, JPM will be hard-pressed to avoid the pain entirely."
"Given the current share price of about $46, in the current setting we no longer can foresee enough 12-month upside potential to continue to rate the shares Buy," Moszkowski writes.
JPMorgan Chase's stock rose slightly on Wednesday.
"As we have repeatedly said, banks will need to take higher credit and liquidity related charges during the fourth quarter as they try to get ahead of these issues," writes Robert Patten, a managing director and senior bank analyst at Regions Financial's Morgan Keegan. "We expect many more 8K's across the group between now and until banks report 4Q earnings in the second half of January.
"Despite the short-lived rallies that we have seen in bank stocks, we remain cautious in our near-term outlook, as there is no good news that we expect from the banks as they work their way through these credit and liquidity issues," Patten adds in a note where he cut his earnings estimates on Wachovia. "Picking a bottom in the bank stocks is very difficult."