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.
Still, the firm's analysts said they "do not expect many banks to discuss the 2009 outlook and those that do are likely to give a sobering sense of reality." Capital raises remain prevalent in the banking sector, particularly as the credit environment gets worse. Throughout the rest of the year and into next year, credit costs will remain high, as the troubles seen in subprime and residential construction loan portfolios spread to other areas, including credit cards and prime mortgages, analysts say. Several large banks have already warned of third-quarter troubles. Late Monday, Bank of America reported earnings ahead of schedule, and the results were not pretty. The bank earned $1.18 billion, or 15 cents a share, down by more than two-thirds from the year-earlier period. BofA also announced plans to sell up to $10 billion of common stock and slash its dividend in half to 32 cents a share to shore up capital as credit losses intensify. Oppenheimer analyst Meredith Whitney estimates that recent capital raises between Goldman Sachs ( GS), General Electric ( GE), JPMorgan Chase and BofA total $45 billion. In addition, depending on which bank wins Wachovia, Citi expects to raise an additional $10 billion, while Wells Fargo said it would raise $20 billion in capital. "With such massive capital raises, we believe a 'sooner is better' mentality will prevail, as far as capital raises, and distinguish survivors and the more challenged among banks," Whitney writes in a note Tuesday.
Loan portfolios showing trouble spots such as home equity, subprime mortgage and homebuilders have "spread" to include first mortgage residential portfolios, unsecured consumer lending and credit card portfolios, BofA said. The company added nearly $2 billion to its allowance for loan losses in the three months ending Sept. 30. "The economy has moved to a recessionary environment and the risk of a prolonged recession has increased," BofA said in the earnings release. "Consumers are experiencing higher levels of stress from depreciating home prices, rising unemployment and tighter credit conditions. Higher levels of bankruptcies are occurring and delinquencies and losses have increased in all consumer portfolios."
The Fox-Pitt analysts perceive the third quarter as "an inflection point" for Citi as the "focus shifts from writedowns to credit costs," according to the industry note. Still "
w e would continue to recommend patience as both Citi's issues and the macro environment will surely take some time to turn around."
Additionally, JPMorgan Chase also said in preliminary results announced at the same time as the WaMu deal that net charge offs in its retail franchise are continuing to trend higher. The bank plans to add roughly $600 million to its allowance for loan losses to prepare for further losses in its subprime and prime mortgage portfolios, it said. It also plans to take $3 billion to $3.5 billion in writedowns on mortgage-backed securities and leveraged loans. JPMorgan Chase reiterated that card losses will be roughly in the 5% range, among other things. "We see JPMorgan Chase as a relative winner in the current stressed market conditions," according to Richard Staite, an analyst in London at Atlantic Equities, in a note where he upgraded the stock to overweight following the deal announcement. "Its size, financial strength and diversity ensure it is seen as a safe haven counterparty for clients that range from the man on the street to hedge funds," Staite wrote.