NEW YORK ( TheStreet) -- Bank earnings in the fourth quarter could be a tough read for investors, as a number of one-time charges and gains could cloud the scorecard. Analysts already have significantly lowered their estimates for the fourth quarter, with weak capital markets and trading activity and the
Durbin Amendment expected to take a toll on revenue, while margins continue to be under pressure from lower interest rates and higher expenses. Low expectations are usually a good thing, because the downside is limited from an upset and companies that do manage to positively surprise could see shares move higher. However, it might not be easy at the very first glance to tell if a bank has managed a clean earnings beat in what is likely to be a very noisy quarter. Analysts routinely differ in the way they adjust for one-time gains and charges when arriving at their final estimates, but most likely will have a long list of special/lumpy items that they will have to exclude in their analysis of fourth-quarter results. Already some banks have warned of the special items that could figure in their earnings reports this quarter. Citigroup ( C) has said it will record a $400 million charge tied to a firm-wide layoff program in the fourth quarter, as well as a $300 million non-cash valuation adjustment against deferred tax assets in Japan due to recently passed legislation that lowered corporate tax rates. Bank of America's ( BAC) fourth quarter will include several one-time gains tied to its preferred shares for a common stock swap, its sale of shares of China Construction Bank and the sale of its Canadian credit card book. Deutsche Bank analysts expect Bank of America to report a $300 million mortgage putback hit, a $500 million litigation expense, a $400 million securities gain, $250 million in assessments/waiver costs, a $475 million hit from the Durbin Amendment, a $1.5 billion loan-loss reserve release ...you get the idea. In the third quarter , Bank of America reported a $6.2 billion profit , boosted by several one-time gains as well. Morgan Stanley ( MS) revealed that its settlement with bond insurer MBIA ( MBI) would result in a $1.8 billion pretax loss in the fourth quarter, though it will help release an additional $5 billion worth of Basel III capital.
The investment bank is quite notorious for its habit of surprising with a number of one-off items each quarter from unforeseen hedging gains or losses and tax benefits to joint venture charges. And this is before we consider that rogue accounting adjustment to debt valuation (DVA), which helped inflate earnings last quarter. Banks are required to reflect changes in the market value of their debt, which ironically allows them to profit when spreads on their debt widen in a market panic and lose when fears ebb and spreads tighten. Banks reported billions in gains in the third quarter when anxiety over their European exposure was at its peak. That effect will reverse this time around as they likely will report a DVA loss, will further skewing the quarter-to-quarter comparisons. Banks will also feel the full effect of the Durbin amendment, which limits the fees banks can charge merchants for debit card transactions, for the first time in the fourth quarter. Banks have yet to find ways to offset the impact on revenue after plans to charge customers debit card fees went awry. Diligent analysts do factor in a number of these items into their earnings estimates and the consensus likely factors in the potential for negative surprises. Still, the average investor would be wise to wait to digest the numbers before trading off of them. --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: email@example.com.