Don't Think All Bank Earnings Will Be the Same

Have you noticed that bank earnings reports so far have been pretty good? Wells Fargo (WFC) reported a good quarter and raised their dividend 10% yesterday, which sparked the market rally, despite the company's large exposure to the California housing market. Today we got earnings above expectations from JP Morgan Chase (JPM) and PNC Financial (PNC). Does that mean that all the banks are out of the woods? Not really.

Unfortunately, the first banks to report were the better managed banks in the country [you can add U.S. Bancorp (USB) to the aforementioned three]. Those four banks are very good at managing risk, hence their strong relative performance. The Wells Fargo report yesterday does not mean that other California-heavy mortgage lenders will be as fortunate. Wells simply had stronger underwriting criteria during the boom than other banks such as Washington Mutual (WM), National City (NCC), and Wachovia (WB), which can easily be seen in the underlying performance of their loan books.

Investors should continue to refrain from treating all banks the same. Companies like PNC, WFC, JPM, and USB are going to outperform the likes of WM, WB, and NCC for the second quarter and beyond simply because they have much better lending practices.

Full Disclosure: Long PNC and USB at the time of writing

Comments

[Jimmy Lathrop:]

If WFC is so great, can anyone explain the 2.1 B unrealized loss on securities that was the result of higher yields on mortgage backed securities? Because WFC didn't. They just put that out there and kept moving forward. And that is why the analysts downgraded WFC after the 10K filing - it is untrustworthy.

2008 Jul 17 06:32 PM

[fatcat:]

Chad,you are living in a dream world...why don't you try reading the full report from wfc...I'm short as of yesterday afternoon....also short JPM today.

2008 Jul 17 09:10 PM

[Toeser:]

USB does have high lending standards, but that is not even the primary reason they have outperformed other banks. USB has one of the highest fee income ratios in the industry. They are very, very different from most other banks.

2008 Jul 17 09:27 PM

[Ames Tiedeman:]

WFC increased their dividend. What better judge of their confidence than this?

2008 Jul 17 09:55 PM

[flashrob:]

...how 'bout a LITTLE TRANSPARENCY - like we were promised by just about everyone - on BANKS PROFIT NUMBERS...

Like how, IN A CONTINUALLY DECLINING ECONOMY they are managing to be profitable - something STINKS here....

like: their assets continue to decline (ok, so assets are revalued upward because of modification of "mark-to-mkt" ...and that's tricky because if only applies to DERIVATIVES of the investment banks....)
so, they get a little help in shoring up asset vals....

BUT IN A "WORLD CONTRACTING ECONOMY" ...WHO ARE THEY MAKING PROFITABLE LOANS TOO...who's needs capital to EXPAND when just about everyone is DOWNSIZING...how much money do you need to downsize?

so, let's have TRANSPARENCY on the BANKS NUMBERS and analyst eval on how they plan to keep making loans (like who needs loans, except the "consumer" who NOW DOESN'T QUALIFY FOR a credit/loan...with either his job loss...or I heard the CreditCard companies are already DOWNGRADING CREDIT of people who they feel are AT RISK OF LOSING THEIR JOB, etc.

...and as long as we are still topping 500k job losses a month...with corresponding LOSS OF CREDIT...and probably default by those people on their mortgages....where are these BANKS MAKING PROFITS...

I WANT TO SEE THE NUMBERS "AND HOW THEY ARE GENERATED," THEIR PLAN GOING FORWARD FOR REVS, ETC....

BANKS AND OBAMA... STOP MEDIA SPINNING "GOOD NUMBERS" WITHOUT "SHOWING ME HOW YOU ARRIVED AT THEM!

...another FINANCIAL fantasy shuffle appears to be taking place EVEN BIGGER THAN THE "REAL ESTATE" chain-letter (that ran out and precipitated all this mess)...

SHOW ME HOW THEY ARE MAKING PROFITS based on growth, NOT JUST ACCOUNTING RULE CHANGES, OR BORROWING CHEAP FROM THE GOV and loaning to a FEW who yet have credit and might need funds (small biz staying alive mostly trying to weather the storm for better consumer days....) OR BUYING EACH OTHERS STOCK/ASSETS to:

PUMP UP THE FINANCIALS IN THE STOCK MKT!

It don't compute: Declining GROWTH, Declining CREDIT for most, where ARE REAL PROFITS FOR FINANCIALS COMING FROM...

other than TRICKY ACCOUNTING, SHUFFLING OF ASSETS, BUYING EACH OTHERS STOCKS....

FLASHROB

Apr 13 12:08 PM