After a massive jump in earnings earlier this year, big banks are closing out 2009 with a sharp drop in profits in the fourth quarter. What’s next for the financial industry in 2010 after this earnings stumble?
The financial sector was due to post major earnings this week. Here’s what analysts were expecting:
Citigroup (C:NYSE), Bank of America (BAC:NYSE), Wells Fargo (WFC:NYSE), and First Horizon (FHN:NYSE) are expected to post losses, while Bank of New York Mellon Corp. looks to bring in modest profit.
There are some promising signs. Wells Fargo will be nearly flat, losing a projected $0.02 a share this quarter, after losing 79 cents for the whole of last year. Wells is also reporting that all of the TARP loans and bailout money it received last year has now been repaid. Meanwhile, Credit Suisse has raised Bank of America stock to an Outperform rating, expecting earnings of 80 to 90 cents a share for all of 2010.
And here’s what we knew before Monday:
The large investment banks are the true financial standouts. JPMorgan (JPM:NYSE) beat earnings estimates last week, and Morgan Stanley (MS:NYSE) is expected to report a healthy profit this week. Goldman Sachs (GS:NYSE) is likely to report whopping earnings, with analyst estimates projecting $5.19 a share.
The First Round
Quarterly earnings came out on Tuesday for Citigroup, and they are right in line with what Wall Street expected – a loss of $7.6 billion, or 33 cents per share.
All eyes wanted to see a decent number for top-line revenue, and details of how loan losses and defaults are subsiding for Citi. Unfortunately, investors are going to be left scratching their heads wondering when the bulls will begin running for these companies.
First, Citibank reported 33 cents a share, which was in line with Wall Street consensus, but the top-line number was a disaster, missing by almost one-half billion.
“Citigroup Inc. posted a $7.6 billion quarterly loss on costs related to Trouble Asset Relief Program (TARP) repayment and still high loan losses, but the bank’s shares edged higher as some investors saw glimmers of hope,” reports Dan Wilchins for Reuters.
That’s up 16% from the fourth quarter of 2008, and that has some analysts worried about more losses ahead.
Investors are torn between the narrowing losses and the first quarterly loss in three consecutive quarters.
Sadly, Citibank doesn’t seem to be turning a corner, despite the government loans and spin-off of some expense-heavy assets. And, the prognosis isn’t looking too great for a company that many said would be a banking behemoth for generations to come.
“Based on JPMorgan, the best of breed, that didn’t quite do it for the banks, you can’t expect one of the lower tier banks to do much better,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, N.J., to BusinessWeek magazine. “Eventually people have to realize and come back to reality that government stimulus won’t last forever, and these banks will have to stand on their own with a new business model.”
Citi’s earnings report, similar to JPMorgan’s, stated how consumers continue to struggle to repay their loans. The financial services bank had set aside $8.18 billion to cover bad loans during the quarter.
Low Trading Activity Hits Earnings
Also on Tuesday TD Ameritrade (AMTD:NASDAQ) released earnings. The EPS number missed the consensus by 2 cents, but for a company that depends so much on the retail investor trading stocks, the company said volumes were abysmally low.
The TD Ameritrade report is a complete different animal because the firm is relying on heavy trading volume more so than loan defaults. And, for a company that needs an up-and-down pattern in the markets, the fourth quarter proved to be the opposite. Trading volume plummeted for the online discount brokerage, thus cutting into what would have been a relatively fine quarter.
Earnings are being driven lower “primarily by signs of a pronounced decline in trading activity and abnormally low interest rates,” Matt Snowling, an analysts at FBR Capital Markets, wrote in a report last month, obtained by Bloomberg News. “We are awaiting a better entry point into the name and a more favorable operating environment, which we believe will reveal substantially higher earnings power.”
The
Asset-based revenue for TD Ameritrade declined 10% to $284.2 million, curbing sales to $624.6 million. This amount resulted in a 2.3% gain from the year-earlier quarter.
Round Two
The hits kept on coming for the financial behemoths as Bank of America and Morgan Stanley reported fourth-quarter earnings that missed their targets and offered very little to look forward to in the coming months. Shareholders are left scratching their heads wondering not when, but if, these companies will ever return to pre-recession profit levels.
Bank of America’s earnings report showed a loss per share of 60 cents for the fourth-quarter, compared to a loss of 48 cents a share in the same quarter a year ago. On average, Wall Street analysts were expecting a loss of 52 cents a share.
The top-line revenue number wasn’t promising either. Quarterly revenue was $25 billion, which was up 59% from the year-ago period, reflecting in part the addition of Merrill Lynch. But the revenue figure fell short of the $26.8 billion predicted by analysts.
The news for Morgan Stanley was just as disappointing as the bank missed its revenue target by a full $1 billion. The New York bank reported 29 cents a share on $6.8 billion in revenue, but Wall Street analysts were expecting 36 cents a share on $7.8 billion in revenue. According to the earnings statement, “the Morgan Stanley Smith Barney joint venture more than doubled the revenues from its global wealth management operations to $3.1 billion,” thus preventing an even lower reported revenue figure.
Goldman Sachs
Goldman Sachs is the most recent big U.S. bank to report fourth-quarter earnings this week, and its numbers are – by far – the best of the bunch.
Beating analyst estimates of $5.20 profits this quarter, Goldman Sachs actually reported earnings of $8.20 a share.
Further, for the year, Goldman Sachs nearly doubled revenue, and had its most profitable year ever.
Much of the credit for that goes to Goldman Sachs’s salary-shaving measures. “We are not deaf to the calls for restraint and we heard them,” David Viniar, Goldman Sachs’ Chief Financial Officer, said in a recent media conference call.
While 2007 was a better year for revenue, a much larger chunk of proceeds went to employee salaries. This year, employees averaged nearly $200,000 less in compensation – down to around $498,000 – while charitable giving by the firm was ramped up.
Goldman Sachs looks great next to the other big names that went recently. JPMorgan Chase beat analyst expectations, but sounded very cautious and unsure about 2010. Morgan Stanley reversed its losses and turned a tiny profit, yet fell below analyst estimates. Citigroup and Bank of America both reported steep losses.
Yet, despite its powerful position leading big banks back to profit, and despite soundly beating analysts expectations, Goldman Sachs traded down over 3% in late-morning Thursday trading.
That’s not a good sign for the stock market, which got trounced in general Thursday morning.
Goldman Sachs is also right in the crosshairs of the President Obama bank fee scheme – which hopes to assess a fee on all banks with $50 billion+ in holdings, and curb securities trading.
With President Obama’s bank curbs program gaining visibility, and jobless numbers as bad as they’ve been in two months, it appears many investors are sitting back or collecting profits.
2010 Bank Outlook
Bank officials at Bank of America attempted to provide some bright news in the earnings release, but still remained extremely cautious as investors and analysts will certainly draw down their prognostications for the first and second quarters of 2010.
“As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses,” Bank of America CEO and President Brian T. Moynihan said in the statement. “That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”
One uplifting statement in the earnings report released detailed how assets under management for the Charlotte, N.C.-based banking giant have risen exponentially for the entire year. According to The New York Times, “the bank, which acquired Merrill Lynch in 2008 at the height of the crisis, said its total assets soared to $2.4 trillion at the end of 2009 from $1.9 trillion” a year ago.
Citigroup also showed some optimism.
For the full year, Citigroup posted a loss of $1.6 billion. That said, these numbers show a stark contrast to 2008’s loss of $27.7 billion, with $17.3 billion in the fourth quarter alone.
In that light, it’s hard not to see this quarter as encouraging for 2010.
The company says, “As we enter 2010, we are strongly capitalized, significantly more efficient, and are executing on a clear strategy that is focused on clients.”
These feelings of optimism certainly don’t eliminate the risk found in all the negative earnings.
And yet, some analysts still see better days ahead. Jason Goldberg, a banking analyst at Barclays Capital, said losses from credit cards and home equity loans remain troubled but appear to be stabilizing.
“At some point you do burn through troubled credit,” Goldberg said. With unemployment likely to peak in the coming months, “the rate of increase in losses should slow throughout the year.”
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