Banks Continue Their Slide: When Will It End?

Includes: AIG, BAC, C, FAS, FAZ, GS, JPM, MS, WFC
by: Bill Maurer

On Monday, the financials took another leg down, leading U.S. markets lower on the day. Most of the damage was due to the usual suspects: uncertainty over Europe, fears of more capital needed, and more negative analyst notes out.

So, what's in store going forward? We'll, let's first look at what was said on Monday.

One culprit was news that the Fed may accept new Basel rules requiring banks to hold more capital. On top of the already 7% capital needed, here's what else would be needed for the big banks.

  • JP Morgan (JPM) and Citigroup (C) could need 2.5% more.
  • Bank of America (BAC) could need 2% more.
  • Morgan Stanley (MS) and Goldman Sachs (GS) could need 1% to 1.5% more.
  • Wells Fargo (WFC) could need 1% more.
  • Additional regulation to affect other names, including American International Group (AIG).

Another piece of news was Nomura cutting its Q4 earnings estimates for several big banks on difficult trading environments, softness in investment banking, and limited expense flexibility. The following price targets were also cut by the firm.

  • Bank of America from $8 to $7. A 12.5% cut, but still implies 40% upside.
  • Citigroup from $38 to $36. A 5.26% cut, but still implies upside of 45%.
  • Goldman Sachs from $141 to $130. A 7.8% cut and potential upside of 48%.
  • Morgan Stanley from $20 to $18. A 10% cut and 27% upside.

Those are just two pieces of news that came out, and I didn't really even mention anything related to Europe. I could go on and on, but there is so much negative news associated with these firms now, that not every single piece of news is worth mentioning. The decline in the sector increased late in the day after Bank of America fell below the crucial $5 mark. Thanks to everything that's gone on recently and throughout the year, here's how these names have performed over a few selected time periods. The longer dated performances are dividend adjusted. Note that there are only 4 periods where a name actually showed positive results. It has been a terrible year for this sector.

Symbol Monday 1-week 1-month 3-month 1-year
BAC -4.13% -8.44% -13.52% -28.51% -60.11%
JPM -3.73% -4.18% 0.26% -4.69% -20.94%
GS -2.66% -10.54% -4.22% -16.00% -45.91%
C -4.65% -8.82% -5.56% -10.40% -47.15%
MS -5.47% -7.93% -0.35% -6.23% -45.56%
WFC -2.58% -3.73% 2.51% 4.54% -14.26%
AIG -4.28% -3.99% 2.19% -9.33% -49.23%

I mentioned that it seems like analysts are cutting estimates on the sector each day. You can see that partially in the following table. You will notice a fair number of increases from one time period to the next. Those are upward revisions based on earnings beats from last quarter, like the 84 cents that Morgan Stanley beat by. A couple of these names have seen estimates go up thanks to those large beats, including Bank of America, Citigroup, and Morgan Stanley. Wells Fargo has seen its numbers remain flat, while the other three names have seen their estimates get slashed.

2011 EPS 90 days 60 days 30 days 7 days Current
BAC ($0.30) ($0.32) ($0.01) $0.02 $0.02
JPM $4.81 $4.60 $4.58 $4.57 $4.53
GS $9.51 $7.35 $6.17 $5.99 $5.74
C $4.04 $3.81 $4.08 $4.09 $4.08
MS $1.14 $0.88 $1.58 $1.57 $1.33
WFC $2.81 $2.82 $2.81 $2.82 $2.82
AIG $3.38 $3.07 $0.92 $0.86 $0.86

While the 2011 numbers have seen some fluctuations in both directions over the past few months, the following table shows how that is not the case for 2012 estimates. They are only going down. In percentage terms, Morgan Stanley and Bank of America have seen the largest downward revisions, over 20% each. That is not surprising, since these two names are supposedly in the worst shape. Wells Fargo has seen its numbers trimmed the least, but that's hardly comforting, since you are still looking at a 4% downgrade. The only thing that seems certain here is that these numbers will continue to go lower as time goes on. Or at least until they beat, when numbers come out. Then we might see the numbers shoot back up, only to be taken down again and again.

2012 EPS 90 days 60 days 30 days 7 days Current
BAC $1.23 $1.12 $0.99 $0.98 $0.97
JPM $5.37 $4.94 $4.93 $4.92 $4.87
GS $15.53 $14.14 $13.51 $13.28 $13.00
C $5.03 $4.70 $4.44 $4.39 $4.37
MS $2.63 $2.31 $2.13 $2.13 $2.04
WFC $3.36 $3.31 $3.24 $3.24 $3.23
AIG $3.05 $2.92 $2.65 $2.61 $2.61

Is there a light at the end of the tunnel? Possibly. Despite all the bad news coming out, and all of the downgrades on credit ratings and earnings, analysts are actually slightly positive on the sector. The following table shows the overall analyst rating on the stock (1=strong buy, 5=sell), with the average price target, price target range, and potential upside, based on the average target. There is plenty of upside in these stocks once they can turn things around. Interestingly enough, six of the seven names are currently above the lowest price target, with Wells Fargo being the only exception.

Analysts Rating Target Range Upside
BAC 2.4 $9.74 $6 to $14.50 95.19%
JPM 1.8 $46.63 $35 to $58 51.89%
GS 2.3 $135.83 $100 to $174 54.88%
C 2.3 $42.65 $28 to $55 71.84%
MS 2.3 $22.66 $16 to $30 60.03%
WFC 2.0 $32.54 $24.33 to $41 28.57%
AIG 2.8 $27.25 $23 to $32 21.87%

These upside numbers may seem impossible at first glance, but one year ago Bank of America was at $12.50, so why can't it get back to $10 in a year? Goldman Sachs was above $163, and AIG was at $44. These names could rebound as quickly as they fell. However, they need some help, particularly from Europe. I don't see this sector's problems being fixed in the extreme near future, so I fear investors could experience some more short term pain. However, some of these names are starting to approach valuations that many longer term investors will be willing to pay.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I sold out of FAZ on Monday, but may enter again on a large rally, or may initiate a position in FAS on a large drop.