Bank Stocks Pull Bank Ahead of Earnings

NEW YORK (TheStreet) -- State Street (STT) led the banking sector lower on a rough day for the broad market, with shares sliding 2.8% to close at $72.82.

The Boston-based custody bank and asset manager will announce its fourth-quarter earnings on Jan. 24, with analysts polled by Thomson Reuters on average estimating earnings of $1.19 a share, unchanged from the previous quarter but up from $1.11 a year earlier.  Analysts estimate State Street's revenue will rise to $2.499 billion for the fourth quarter, from $2.469 billion in the third quarter and $2.463 billion during the fourth quarter of 2012.

The Dow Jones Industrial Average , ended with a 1.08% decline, while the S&P 500 was down 1.3% and the NASDAQ Composite fell 1.5, as investors showed worry over earnings season and continued to fret over Friday's disappointing employment growth numbers.

Bank stocks also took a pounding, with the KBW Bank Index (I:BKX) ending 1.2% lower at 69.84, with all but two of the 24 index components showing losses.

The Department of Labor on Friday said the U.S. unemployment rate during December declined to 6.7% from 7.0% in November, but the improved unemployment rate was driven in large part by 0.2% decline in the labor participation rate to 62.8%.  The labor participation rate declined 0.8% during 2013, with a large number of people have effectively been driven from the labor force.

The Labor Department said the U.S. economy added just 74,000 nonfarm jobs during December, a far cry from the consensus estimate of 192,000, among economists polled by Reuters.

Federal Reserve Bank of Atlanta president Dennis Lockhart in a speech on Monday said "the labor market is not as healthy as the improved unemployment rate might indicate. The unemployment rate drop may overstate progress achieved."

The 6.7% unemployment rate is a key figure, since the Federal Open Market Committee has repeatedly said it was unlikely to raise its target for the short-term federal funds rate until the unemployment rate drops below 6.5%.  The federal funds rate has been held to a range of zero to 0.25% since late 2008.

Lockhart on Monday reiterated that the FOMC wouldn't change its policy for the federal funds rate until "well past" the achievement of the 6.5% unemployment rate.

But there are still some bright economic lights, according to Deutsche Bank chief economist Joseph LaVorgna.  "Our best guess is that inclement weather dampened hiring by 100k last month and accounted for the one tenth drop in the nonfarm workweek to 34.5 hours. Following weather-related weakness in December 2005, nonfarm payrolls increased by +274k in January 2006."

LaVorgna in a note to clients late on Friday also wrote that the Federal Reserve's Flow of Funds report showed "a substantial improvement in household buying power," during the fourth quarter, with increased cash flow, consumer debt and rising home prices.

"When we combine the $399 billion gain in household cash flow with a $63 billion increase in consumer credit and a $2.2 trillion increase in homeowners' equity, we arrive at a $2.6 trillion increase in household buying power, which is the largest gain on record, surpassing that of 2012," he wrote.

Earnings Season

Earnings season for the nation's largest banks begins on Tuesday, with JPMorgan Chase (JPM) leading off, followed by Wells Fargo (WFC), both before the market open.

In the third quarter, JPMorgan Chase posted a surprise net loss of $380 million, or 17 cents a share, driven by $9.15 billion in provisions for litigation reserves.  The bank reported $23 billion in legal reserves set aside as of Sept. 30, which more than covers the $17.5 billion in residential mortgage-backed securities settlements the company entered into with government authorities and investors during the fourth quarter.  But JPMorgan did say its fourth-quarter after-tax earnings would be lowered by $850 million, as a result of its $2.6 billion settlement with the Department of Justice and regulators over its role in the Bernard Madoff Ponzi Scheme.

Analysts on average expect JPMorgan to post fourth-quarter earnings of $1.35 a share, down slightly from $1.39 a year earlier.  JPMorgan's shares were down 1.5% Monday to close at $57.60.  Please see What JPMorgan Shareholders Really Care About for more on what to expect from the company.

Wells Fargo continues its strong operating performance, with a return on tangible common equity (ROTCE) of 17.86% for the first three quarters of 2013, according to Thomson Reuters Bank insight.  The consensus fourth-quarter EPS estimate for the bank is 98 cents, down a penny from 99 cents during the third quarter, but up from 92 cents a share during the fourth quarter of 2012.

Wells Fargo's shares were down 0.8%, closing at $45.56.

Please see Regional Bank Earnings: What to Expect, for a detailed discussion of several challenges facing major U.S. banks, as wells as opportunities in 2014.

This chart shows the stock performance of State Street, JPMorgan and Wells Fargo against the KBW Bank Index and the S&P 500 since the end of 2011: 

STT Chart data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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