Many big U.S. banks may post lackluster fourth-quarter results, hurt by volatile interest rates, increased credit losses and a slowdown in mortgages, analysts said.
Larger banks, including those with big non-U.S. operations, may offset weakness elsewhere with strength in asset management, investment banking and trading. But competition intensified for deposits, and a surge in bankruptcy filings may hurt companies with big credit card operations.
"People expect negative or sluggish results from regional banks, yet their stocks are still selling at a premium because of takeover speculation," said Steve Roukis, managing director at Matrix Asset Advisors Inc. in New York, which invests $1.8 billion. "Bigger banks have global franchises and more diversified businesses, and they have done very well."
Lehman Brothers Inc. analyst Jason Goldberg and Merrill Lynch & Co. analyst Edward Najarian expect earnings at banks they cover to be unchanged from the third quarter.
Goldberg, who covers 49 banks, expects earnings to rise 10.5 percent from a year earlier. Najarian expects a 6.7 percent increase at 13 large regional banks.
Buffalo, New York's M&T Bank Corp., which counts Warren Buffett among its largest investors, kicks off earnings season on Wednesday. Citigroup Inc., JPMorgan Chase & Co., Wachovia Corp. and Wells Fargo & Co. report the following week. Bank of America Corp. reports on Jan. 23.
Rate worries
Many analysts worry that the convergence of long- and short-term interest rates may crimp lending margins.
The Fed has increased short-term rates to 4.25 percent from 1 percent since June 2004, but long-term rates have barely budged, and at times slid below short-term rates.
That has resulted in a "flat," and in places "inverted" U.S. Treasury yield curve. This is worrisome because a flat or inverted curve has sometimes signaled an impending recession, as in 2000, and could foreshadow more customer loan defaults.
"If an inverted yield curve signals a recession or slowing economy, being more cautious on banks makes sense," said Mark Batty, a financial services analyst for PNC Advisors in Philadelphia, which invests $50 billion. "If it reflects that foreign investors are buying Treasuries, it has less bearing." He expects the curve to assume a more normal shape this year.
Still, credit quality will be an issue. Analysts estimated there were more than 500,000 U.S. bankruptcy filings in the week before Oct. 17, when tougher bankruptcy laws took effect. That approaches the 542,000 filings from July to September, a record for a quarter.
Citigroup said the surge might cut fourth-quarter results by $310 million. Higher credit losses may cost Bank of America $400 million to $500 million, JPMorgan $700 million and Wells Fargo $175 million, the respective banks have said.
Undervalued, or not?
Results may also include other "noise," Goldberg said, including balance sheet restructurings, revised accounting for leases, and accelerated vesting of stock options.
While weak or nonexistent growth in consumer borrowing may curb fee income, commercial loan demand may be strong, and banks including Wachovia and PNC Financial Services Group Inc. will continue their cost-cutting drives.
And analysts expect Citigroup, Bank of America and JPMorgan to post solid investment banking and trading results, mirroring gains at investment banks such as Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. .
The Philadelphia KBW Bank Index rose 8 percent last year, five times the S&P 500's gain.
Still, the five biggest banks trade at 10.5 to 12.6 times expected 2006 earnings, below a 15.2 multiple for the Standard & Poor's 500 index, Reuters data show.
Batty and Roukis said the biggest banks appear undervalued. "They still have opportunities to cut costs because they are creatures of big mergers," Roukis said.