BOSTON ( TheStreet) -- The nation's two biggest banks, Bank of America ( BAC) and Wells Fargo ( WFC), will let investors know if they've overcome their problems with troubled assets this week when they report their second-quarter results.More than two years have passed since bank stocks helped bring major benchmarks to a 12-year low. Bank of America and Wells Fargo shares have doubled since March 2009 as the companies shed bad mortgages and shored up their balance sheets with the help of government aid. Still, analysts are betting that the banks aren't out of the woods.
"The main risk for these large banks, in our view, is fee income and loan growth," Oja wrote in a research note. Government regulations enacted during the past year related to credit and debit card transactions has hurt fee income and increased costs. "Bank managements remain cautious about loan growth, due to persistent economic uncertainties, which are likely causing small and mid-size employers to delay hiring and capital spending," he wrote. Wells Fargo is in better shape than Bank of America, which swallowed the poisonous mortgage portfolio of Countrywide Financial two years ago. Timothy Sloan, chief financial officer of the San Francisco-based bank, said last month that demand for new business loans has remained steady despite the slowing economy. Wells Fargo is expected to report second-quarter earnings of 54 cents a share, down from 67 cents in the first quarter and 55 cents a year earlier. The company is expected to report earnings of $2.77 a share for 2011. For fiscal year 2012, analysts estimate that it will post earnings per share will grow by 22% to $3.39 per share. Analysts are all over the map on Wells Fargo, with six "buy" ratings, 13 "buy/holds," 9 "holds," two "weak holds" and one "sell." S&P has Wells Fargo rated "hold," noting that it too, is still struggling with its Wachovia acquisition, a deal brokered during the financial crisis in 2008. Oja writes that Wells Fargo is seeing "a continuing run-off of legacy loans, (so as a result) we expect net interest income to fall 4.3%, following a 3.4% decline in 2010." "Also, (Wells Fargo's) funding costs are among the lowest in the industry, a positive, but have little room to fall further, a negative," he said. Giving signs of promise for the still recovering banking sector, investment banking giant JPMorgan Chase ( JPM) with a market value of $160 billion, reported second-quarter earnings last Thursday that beat Wall Street's expectations by 6 cents per share. It also reported revenue growth of 7%, when the Street was predicting a decline of 2%. Still, JPMorgan Chase's shares are down 7% this year.
The drops in bank stocks might create a buying opportunity for investors who are confident that U.S. economy will gain steam soon. Shares of Bank of America and Wells Fargo are trading at less than 10 times earnings, making them cheaper than the average bank stock. Members of the KBW Bank Index have an average price-to-earnings ratio of 13. The Fairholme Fund ( FAIRX) has 5.6% of its assets invested in Bank of America, the largest bet on the company by an actively managed fund. Fund manager Bruce Berkowitz , who's known for his contrarian bets, has filled his $15 billion fund with financials, led by American International Group ( AIG). While the banks are struggling now, their size and geographic reach will help them mobilize as loan demand picks up. When the economy rebounds, large banks will start minting money again.
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