Merrill Lynch analysts dropped their earnings estimates Tuesday for 12 large-cap regional U.S. banks -- including Bank of America, Wachovia and Wells Fargo -- over concerns relating to current economic conditions in the U.S. Wachovia's EPS target was lowered to $4.90 from $5.05, Bank of America's was reduced to $5.10 from $5.25, and Wells Fargo's estimate was cut to $2.95 from $3.00 (the other banks appear below in Stocks/ETFs to watch). Merrill analysts Edward Najarian, Brian Bedell and Dwain Carryl said the probability of a U.S. recession is now 65%. The Fed will cut its Fed Funds rate by 50 basis points at the upcoming FOMC meeting on September 18, and a total of 100bps by year-end, yet unemployment will rise from a current 4.6% to 4.9%, they said. "Employment at employment agencies is a leading indicator at best, a confirmation signal at worst, and is -3.3% year-over-year as of July. This only happens in or around recessionary economic phases." GDP growth will slow to just 0.5% in the first half of 2008, due to slackening consumer spending. The analysts said they expect the current credit quality turmoil to peak in 2008. During the past two credit quality deteriorations (1991/2 and 2001/2), banks rallied for 1-2 months on initial Fed Funds cuts, only to decline further after the markets realized a 'profound' credit crisis would not be avoided, a scenario they expect will repeat itself during the current cycle.
Commentary: As Mortgage Brokers Flounder, Consider Investing in Regional Banks • It's Too Late To Short The Financial Sector • Bank of America and Wells Fargo Are Buys At Current Levels
Stocks/ETFs to watch: BAC, WB, WFC, BBT, FITB, KEY, MTB, NCC, PNC, RF, STI, USB, MER. ETFs: IAT, KBE, KBW, RKH
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