NEW YORK – Citigroup, JPMorgan Chase and Bank of America may soon show compelling evidence they have stopped the bleeding in terms of credit losses and loan writedowns.
But when first-quarter results start rolling in next week, investors who have fuelled a blistering rally in bank shares will be looking for signs banks are gearing up to actually make money, rather than losing less.
Most analysts are wary of the continuing toll of consumer credit losses, mainly in credit cards and mortgages, at major US banks. But they also see signs of improvement as the industry emerges from credit woes that began nearly three years ago.
Earnings have stabilised but “We’re still at the stage of less-worse for these banks,” said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management, which owns JPMorgan shares. “They’re dealing with problems as they have to, and as they have the financial means to do so. They’re earning their way out.”
In the first quarter, banks particularly benefited from lower funding costs amid an easing credit environment which fed margin expansion.
Yesterday, Wells Fargo Securities raised large-cap US banks by a notch to “market weight”, citing positive economic data and more clarity on asset-quality trends. Analysts picked Bank of America and PNC Financial Services Group as best-positioned to benefit from an investor focus on normalised earnings. Analysts’ newfound optimism has been matched by investors. The KBW Bank Index rose 21.7 percent in the first quarter, far better than the 4.7 per cent increase in the broader SP 500 index.
Citigroup shares posted the biggest gain among the top banks, up 22 per cent. Bank of America and Wells Fargo rose 18.5 per cent and 15.5 per cent, respectively. JPMorgan Chase was a relative laggard, gaining 7.5 per cent.
Analysts at Keefe, Bruyette and Woods forecast first-quarter net profit of $2 billion for the banks they cover, compared with a loss of $4.4 billion in the 2009 fourth quarter. But they still expect 38 per cent of those banks to report losses.
Of course, improvement among the top banks will be anything but uniform. Ranked by assets, Bank of America is number one, followed by JPMorgan, Citigroup and Wells Fargo. JPMorgan, expected to report earnings of 65 cents per share against 40 cents a year earlier, is widely seen as the strongest of the four biggest US banks, having weathered the financial crisis better than most. Wells Fargo is projected to report 41 cents per share, compared with 56 cents a year ago, according to analyst surveys by Thomson Reuters.
On the rockier side, the two biggest bailout recipients are among the top banks: Bank of America is projected to report earnings of 8 cents per share, down from 44 cents a year earlier, and Citigroup is seen breaking even after losing 18 cents a share a year ago.
“JPMorgan’s the only one able to look forward, while Bank of America and Citi are still looking inward, trying to fix things,” Mr Cole said. “That’s an ongoing process. JPMorgan has the pieces that they want; now they have to figure out a way to grow.”
Citigroup could end up reporting a slightly better per-share result, while Bank of America could be slightly weaker, according to Reuters Starmine, which weights estimates according to analysts’ track records. – (Reuters)
