Banks Stocks Seem Like Near Term Winners

GS beat earnings substantially. GS managed to hide a $1B loss in a forgotten month (December) when they adjusted their accounting period. The last reported quarter was September - November. The most recent reported quarter was January - March. Tricky eh???

WFC pre-announced great earnings ($3B+). Apparently they pulled a bit of a fast one to. They decreased their loan loss reserves (adding to profit). One presumes the changes in the mark to market accounting rules allowed them to do this. This change may have accounted for $1.5B or more of their reported profit.

SCHW earned $.19/share versus an expected $.16.

JPM is widely expected to beat tomorrow.

C has a lot of people worried, but the CEO has pre-announced great earnings for the January - February time frame. Additionally the restructuring of its Capital Markets Operations is apparently proceeding faster and more effectively than at first envisioned. C is still expected to lose money, but even this may be in question. If C can take the same advantage of the new mark to market changes as WFC, C may be much more profitable than analysts have forecast thus far. Analysts' forecasts on C for this quarter have generally been improving. If PJ and SCHW both did better than expected, it might be a good bet that C will too, especially in the Capital Markets Operations.

BAC also pre-announced great earnings for the January - February CEO Ken Lewis cited both the Countrywide and the Merrill Lynch operations as hugely profitable. Given prior announcements, BAC looks like it too should beat by a significant margin, especially given the last minute changes to mark to market. These can't be used in the first quarter, but apparently they can be applied to forecasts for the future quarters. If this allowed WFC to turn a much bigger profit by cutting its forecasts for bad loans, I think we can expect a little extra from BAC due to this also.

Some banks were down today due to UBS (8700 planned layoffs) after a $1.75B Q1 loss. Of course, UBS -- a Swiss bank -- likely doesn't get to take the same advantage of the new mark to market accounting rules.

Also COF had bad news. Its credit card rate of bad loans rose to 9.33% for March from 8.06% in February. However, COF's charge offs in the auto-finance sector fell to 4.08% from 4.44%.

If market psychology holds, the COF and UBS results will be forgotten by tomorrow. Then the likely good JPM, C, and BAC results should move the financials forward over the next several days. No one cares if a good part of this increased profitability is due to "hand waving". This market is just glad to get any kind of good news at the moment. I expect this likely good news will push these stocks up. After the announcements are done, we may find we relapse to more realistic expectations. Time will tell.

Disclosure: Author is currently long C and BAC

Comments

[Mr. Man:]

This is interesting... thanks.

Apr 16 05:13 AM

[whisperonth...:]

No disclosure? Perhaps just a commentator, and not an investor?

Apr 16 08:51 AM

[siew_wah:]

Citigroup, Bank of America, notwithstanding Well Fargo should move to higher levels as their toxic assets are things of the past. All three banks should attract investor interest to take a long term view now that profits are building up- slow and steady. vested.

Apr 16 09:32 AM

[David White:]

Sorry. I am currently long C and BAC. JPM was up nicely earlier this morning, but has fallen along with the overall market. Still results were good.

I am expecting C to move up later today and tomorrow morning. I expect C's results to beat expectations. I am hoping for a good surprise to the upside.

BAC is currently down a little today. However, BAC's results probably have the potential to out shine all of the other banks. Both the Merrill Lynch organization and the Countrywide organization should have done extremely well in Q1. The rest of BAC was doing well even last quarter. I expect BAC to move up at the end of the day today. I expect it to move up at the end of the day Friday. There is a lot of speculation that BAC is at the start of the handle of a "cup with a handle" chart formation. If this is true, BAC earnings may be the trigger that really starts the handle. Alternatively, BAC earnings may be the last push up before a near term retreat. I guess we will have to wait to see how good the BAC earnings are before we can really make a good call on this. I think the chance of a big disappointment in BAC earnings are very small. BAC should beat. It is likey just a question of "by how much"?

Apr 16 11:03 AM

[David White:]

If you are playing the earnings on these stocks, you probably also want to watch Google, which reports today after the market closes. it can move the market.

If you want to determine whether to sell BAC after earnings on Monday, you might want to look at the IBM results. It also reports on Monday. It may do a lot to determine the near term direction of Technology stocks (Google too). This rally is getting a little long in the tooth though, so it might be a good idea to take at least part of you BAC position off of the table after earnings.

Apr 16 11:18 AM

[David White:]

GOOG beat with EPS of $5.16 versus an expected $4.93. GOOG stock is currently up about $19 in after hours trading ($28 for the day). This could change somewhat.

Both C and BAC faltered a little at the end of the day. The DJ news published and online commentary about JPM and COF's rising default rate on credit card debt. The article mentioned that both C and BAC had substantial credit card exposure. Still I am expecting a beat by C tomorrow morning. The DJ article (and COF's) results may be forgatten by then. Of course, C should have its own credit card results by then. I don't imagine C's credit card business will much better. Still I expect the other areas of the business to do much better.

Apr 16 04:11 PM

[David White:]

I should note that both COF and JPM finished up on the day. A good result from C should cause BAC to rally strongly into Monday's Q1 report.

Apr 16 04:12 PM

[David White:]

Another news item indicated that BAC might have dropped back because of its lenient changes with respect to late fees. BAC is going to try not to gouge people as much as some other companies. This may be good longer term for BofA.

Apr 16 04:35 PM

[David White:]

Reuters: Regions Financial Corp (RF.N) shares soared 34 percent after the large U.S. regional bank projected a surprise first-quarter profit, while also announcing a 90 percent dividend cut to preserve capital.

This was just announced by the CEO of RF. I have not found an actual firm figure for the amount of profit. However, RF was supposed to lose $.42/share. This is good news. Along with the JPM, GS, PJ, SCHW, and WFC news, this bodes well for C and BAC. Other regional banks have also done well.

Apr 16 05:13 PM

[David White:]

This news is from MarketWatch:

C did beat its expectations. In fact if you subtracted out some one time costs, it actually made money. Its key improvement was that the Institutional Clients Group swung topositive revenue of $9.51B from negative $4.96B a year ago.

Nothing could make up for the awful news about its credit costs of $10.3B (up 76%).

Revenue fell 10% (to $5.77B) in the Global Cards Division.
Revenue fell 18% (to $6.4B) in Consumer Banking.
Revenue fell 20% (to $2.62B) in Global Wealth Management.

Still C does look like it is making progress in managing its business. It has pared 13,000 jobs since the 4th quarter (leaving 309,000). It is in the midst of a plan to trim 50,000 jobs. It plans to sell hundreds of billions of dollars of non-core assets.

Apr 17 11:22 AM

[David White:]

BAC reported much better than expected earnings today $.44 versus $.04. Still the stock is down. Apparently BAC has the same woes that were troubling banks at the end of last week (souring loans and souring credit card debt). This is pushing the whole market down today.

The one big positive in BAC's results is the data from Merrill Lynch.
The SPY is already below its S2 level on the day. Ditto BAC. Given there is major merger news today (Oracle and Sun, and Pepsi and its bottling companies), it is hard to believe this is likely to be a major down day. Earnings today have been generally good today. I know the market is tired of going up, but today doesn't seem likely to be the day the bottom falls out. I look for there to be a bounce off the S3 levels or before. These levels are SPY = $84.75 and BAC = $9.27.

Of course, I could be wrong. The general behavior of the market does seem to be positive reaction to big mergers, etc. Plus BAC did have relatively good news. After all we did already know they were likely to have souring loans in the current economic climate. Plus the Merrill Lynch result was a huge positive, especially when compared to last quarter's result. As I write BAC is below its S3 and SPY is hitting on its S3.

We will have to see what happens. A break downward likely protends a very negative near term future for stocks. A rally upward may mean there is still some life in the market, or it may simply be a one day reprieve.

Apr 20 10:04 AM

[David White:]

The following is classified as a market rumor so far. However, it may have a lot to do with why the banking stocks and the market in general have taken such a big nose dive today on what has been relatively good news.

"The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent. (Based upon the “alternative more adverse” scenario which had a 3.3 percent contraction of the U.S. Economy in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth of the U.S. Economy but a 10.3 percent jobless in 2010.)

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans. (Without further government injections of cash)

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital! (HSBC is NOT in the top 19 banks undergoing a stress test, but is mentioned in the report as an aside because of its risk capital exposure to derivatives)

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse."

Apr 20 03:19 PM