Be Wary Of Earnings For Banks

Includes: BAC, BBT, C, GS, MS, USB, WFC
by: Kraken

This week, most of the major banks have reported or will be reporting. So far, Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Citigroup (NYSE:C) have reported their earnings. The other gorilla in the room awaiting earnings is Morgan Stanley (NYSE:MS). Morgan Stanley is set to announce before market open on the 19th. It is hard to gauge where the company's earnings will be, but one thing is for sure is that they will most likely be volatile. Lets analyze the recent earnings of the other banks.

Wells Fargo reported that the profit for the three months ended Sept. 30 rose 22 percent to a record $4.06 billion, or 72 cents a diluted share, from $3.34 billion, or 60 cents, in the same period a year earlier, according to the statement. Revenue was down for the quarter, however, falling to $19.6 billion from $20.4 billion a year ago. The stock fell over 8%.

I honestly think that the sell-off on Wells Fargo was overdone. The company is one of the stronger banks and has more liquidity than its peers. I believe a few reasons why investors were cautious was because of the fall in net interest margins. This happened because of deposits invested in short-term investments. I think investors should also note that the company's non-performing assets are falling. The company has also set aside nearly $2 billion to cover loan losses. I think Wells Fargo is doing a fantastic job. The fact that the company reported a record profit on less revenue should tell you how efficient management is.

Bank of America reported a profitable third quarter. The bank reported net income of $6.2 billion, or 56 cents per share, improving on its third-quarter 2010 loss of $7.3 billion. Income after preferred dividends was $5.9 billion. The stock rose over 6%.

So it seems like the company maybe turning around, except for the fact the company reported a higher profit due to accounting gains. The company sold a stake in a Chinese bank. This offset its business from its credit card, real estate, and investment banking business. I do not think BofA's earnings were anything great. It's nice the company is reporting a profit, but it will come as a cost to the company eventually. BofA has been selling assets to shore up some capital, but these assets might be beneficial to the company long term. BofA is now the 2nd largest in bank assets, it dropped from its 1st place position. It's also important to note that BofA has been trying to drive up earnings by cutting costs, not necessarily bringing more revenue. The company has plenty of problems including multiple lawsuits. I think we need to see more from BofA before we can make a full judgment.

Citi reported net income of $3.8bn for the three months to the end of September, 74 per cent higher than the same period a year ago but distorted by a $1.9bn contribution from a “credit valuation adjustment” linked to the bank’s widening credit spreads. The stock fell 1.7%.

The issue with Citigroup is that the company also had a similar situation to Bank of America. The company reported a profit, but had accounting gains as well. The bank's credit-value adjustment provided another $1.9 billion increase in earnings. I do like the fact that Citigroup has lowered its loan losses by 41% since last year. The company is strengthening its balance sheet and could be a great long term play. However, we still want to keep an eye out on what happens going forward with them. Will its fixed-income, equity group, and investment banking pick up the slack?

Goldman Sachs lost $428 million in the third quarter, driven by sharp drops in underwriting and trading revenue brought on by the wild swings in markets this summer. Goldman also had losses from souring investments in stocks, bonds and other holdings. The stock rose over 5%.

Goldman is harder to decipher that's why it might be best to wait and see what the company says next quarter. It is no surprise that their investment banking division is doing poorly, but the fact they are attributing this loss to a decline in equity markets is an interesting statement. Nobody knows what the equity market will do for the next quarter. If the market jumps back up, then the company will be able to report profitability. However, the issue with Goldman is that they their lending and investment banking business is reporting heavy losses and if that doesn't turn around, then investors may start jumping ship.

Three other major banks set to report this week are Morgan Stanley, BB&T (NYSE:BBT), and U.S. Bancorp (NYSE:USB).

I think the market will especially look to Morgan Stanley and their current exposure to Europe. It will also be interesting to see how their investment banking business is faring. Most likely they will report a loss just like its peers, but will it be able to manage it.

US Bancorp and BB&T will both provide a strong gauge on the strength of lending as well as loan losses. I would also look to their non-performing assets and see if they are seeing a decrease in them. Both banks will help us understand how the commercial banking segment is doing in this environment.

I recommend that all investors are carefully understand the accounting tricks these banks used to show gains. Many investors are oblivious to this and should always consider other gains such as sale of a company.

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