Bank Forecasts: Don't Believe Them

by Charles Rotblut

Recent announcements - including those discussed below - have only added to the uncertainty regarding banks, and the broader financial sector. Therefore, the story for investors remains unchanged - be weary of financials.

J.P. Morgan To Announce Early

On Monday, JPMorgan Chase & Company (JPM) announced that it would announce fourth-quarter earnings tomorrow morning, Thursday. The company did not explain why it was releasing quarterly results 6 days earlier than its previously announced date.

Brokerage analysts are bracing themselves for a negative surprise. Just within the week, 2 analysts have lowered their fourth-quarter earnings estimates. These negative revisions, combined with 4 other recent cuts, have resulted in a consensus earnings estimate of 3 cents per share.

JPM has topped reduced expectations for 3 consecutive quarters, so there is a real possibility of earnings not being as bad as feared. Nonetheless, investors should note that 1 month ago, the average forecast called for a 31-cent per share profit.

Citigroup Splitting Apart?

The news comes as Citigroup, Inc. (C) and Morgan Stanley (MS) struck a deal for Smith Barney. The brokerage unit of Citigroup will be placed into a joint venture called Morgan Stanley Smith Barney. C will receive $2.7 billion in cash up front.

An article in this morning's Wall Street Journal discusses plans by the conglomerate to sell other business units, such as some of its consumer finance units. This means that the brokerage joint venture might be the first in what could be several partial or full divestures.

Prior to the credit crisis, Citigroup was criticized for being too big and too bloated. Therefore, any moves to focus on a few core businesses might have long-term benefits. However, given the current state of the industry, it could be a long while before investors actually reap those benefits.

Deutsche Bank Warns

This morning, Deutsche Bank (DB) warned that fourth-quarter losses would total about EUR 4.8 billion. The company blamed "exceptional market conditions" and said much of the losses occurred in its credit trading unit.

The warning came a day after Zacks Equity Research analyst Ann Heffron lowered her 2008 forecast to a loss of $3 per share. Ann correctly predicted that the company would report a larger fourth-quarter quarter loss than was previously expected, though today's warning was worse than even her lowered forecast.

Effectiveness of TARP Remains Unknown

Then there is the Troubled Assets Relief Program (aka "TARP"). The Treasury Department has given out $350 billion in taxpayer money, but can't account for how it is being used. Home foreclosures continue to rise and loans remain hard to get. As far as those troubled assets, well, they are still troubled.

The incoming administration wants to spend the second-half of the TARP funds. They claim the funds will be used to help beleaguered homeowners. Furthermore, the Obama administration says it will exercise better oversight.

Still Don't Trust 2009 Estimates

In the backdrop of all this, earnings estimates for the financial sector continue to fall. Brokerage analysts had no idea where to peg 2009 earnings throughout 2008 and the start of the New Year has not brought any additional visibility.

Rather, 8 full year 2009 earnings estimates are being cut for every forecast that has been raised - a revisions ratio of 0.12. This compares to a revisions ratio of 0.17 for the entire Zacks Rank universe (6 estimates cut for every 1 that has been raised).

(Other banks that brokerage analysts have particularly targeted with negative earnings estimate revisions include BB&T Corporation (BBT) and Synovus Financial Corporation (SNV)). Rising unemployment will place an additional strain on struggling homeowners and will cause a further rise in foreclosures. Credit card defaults will also be higher, A reluctance to spend will generate fewer credit card fees. And if the markets remain volatile, assets under management and associated investment management revenues could be under pressure. It's not a good mix.

The covering brokerage analysts may ultimately be late with reacting to a turnaround in the financial sector. But given the current level of uncertainty, being late to the party is not such a bad thing.

Related ETFs

KBE Bank ETF (KBE) holds positions in JPM, C, BBT and other large banking institutions. Investors wanting more broad exposure to the financial sector may want to look at Vanguard Financials (VFH) since it holds positions in companies like The Goldman Sachs Group (GS) and American Express (AXP).

Comments

[Urbane Gori...:]

Re: "Therefore, the story for investors remains unchanged - be weary of financials."

I think you mean 'wary', not 'weary'... Although either seems to apply.... Lord knows I'm weary of it!!

Also, lets not forget the British and Irish banks that just tanked about 13% today on the news that they too need Big Ben style bailouts... (Get it! "Big Ben"... Whoa! What a pun!)....

jegan ;-)

Jan 14 06:15 PM

[Tradememe:]

Perhaps that game of earnings forecast or estimates need to be stopped. And let analysts spend their time and energy doing some real analysis of what really happened in their specific economic sector.

Jan 14 10:51 PM

[John Lounsbury:]

Tradememe - - -

Wouldn't it be something if analysts reported on business models, prospects for one, two and three business performance and stopped concentrating on quarterly earnings?

Concentrating on quarterly earnings, with five year performance be damned attitudes, is what got us into this mess.

Jan 15 12:37 AM