Outlook on Financials Now That Earnings Are Out

Here’s my take on each of the financial companies earnings:

Goldman Sachs (GS)

It was a great quarter for Goldman Sachs. The investment bank had huge gains from its trading operations and bond offering business. I know that everyone is saying buy Goldman right here and now but I wouldn’t buy the stock at its current levels. The stock is trading at $150 and I would like to know more about the investment bank’s business model will be going forward. Goldman appears to be taking great risks again. Will Goldman’s trading operations be as profitable quarter after quarter?

JPMorgan Chase (JPM)

JPMorgan Chase had a mixed earnings season. The banking giant saw its margins, trading and deposits go down. JPMorgan increased its loan loss reserves for the quarter as its loan portfolio saw increasing delinquencies. JP Morgan did have strong results from its commercial banking and asset management businesses. Analyst Dick Bove says

The reality is that this was a very bad quarter for JPMorgan Chase.

Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable.

Bank of America (BAC)

B of A is my favorite bank because of the upside potential but it is also the bank with the greatest downside risk. Bank of America’s earnings were boosted by its sale of China Construction Bank Corp and its strong deposit base. But the nation’s largest bank is still facing rising charge offs from its commercial, residential and credit card loans. CEO Ken Lewis stated that

Profitability in the second half of the year will be much tougher than the first half.

He attributed much of the bank’s success to capital gains.

Citigroup (C)

I think that Citigroup still faces the same problems that have plagued the company for years. Citi does not have core businesses that make money. If you factor out the sale of Smith Barney to Morgan Stanley (MS), Citi would have lost 2.4 billion in the second quarter. While JPMorgan Chase, Goldman Sachs and Bank of America were all able to generate substantial gains from trading operations, Citi was unable to do the same. The promising news for Citi is that CEO Vikram Pandit stated that troubled asset write downs “may be largely behind us.” This may be true but I still wouldn’t buy Citi even at $2 per share.

Short Term Outlook for 2009

The banking giants were able to post decent results for the second quarter but many of these gains were attributable to capital gains. It is unlikely that these one time gains will be duplicated in coming quarters. Loan losses will continue to grow as unemployment and income levels continue to drop.

Long Term Outlook

When unemployment moderates and the economy rebounds, the earnings power of these mega banks will be realized.