Negative October surprise from bank earnings?

Discussion in 'Wall St. News' started by ASusilovic, Oct 11, 2009.

  1. SAN FRANCISCO (MarketWatch) -- Bank stocks surged during the third quarter, but as companies prepare to report results from the period, several industry experts remain concerned.

    "We are very early on in this credit cycle," Timothy Long, chief national bank examiner at the Office of the Comptroller of the Currency, said at a recent conference.

    "That statement caught everyone by surprise," said Nancy Bush, a veteran bank analyst who attended the conference.

    J.P. Morgan Chase kicks off the bank-reporting season on Wednesday.

    The KBW Bank Index hich tracks shares of lenders, including Bank of America, Citigroup and Chase, jumped 30% in the third quarter, as investors bet that huge increases in bad loans from the mortgage meltdown and broader financial crisis were easing.

    Thinking the worst is behind the industry, investors began looking to 2010 and 2011 when banks should be a lot healthier, according to Richard Bove, an analyst at Rochdale Securities. Third-quarter results will make that leap of faith harder to maintain, he said.

    "Third-quarter earnings for most banks, particularly the regional lenders, will be extraordinarily negative," Bove said.

    He estimates that about 60% of banks will report losses in the period as nonperforming assets continue to grow and charge-offs remain very high. Lenders will also have to increase reserves because they didn't bolster them enough during the second quarter, Bove added.

    Loan growth will likely remain sluggish and net interest margins won't increase much, partly because funding costs have already dropped so much that they can't fall much further, the analyst explained.

    "None of this bodes well for the third quarter," Bove said. "Once the market is faced with the reality of how bad the earnings are, it will be interesting to see whether investors will be able to hold on to these stocks at these price levels."

    Bush is concerned that commercial real estate problems may begin to escalate, while consumer credit losses linger.

    At the end of September, K.C. Conway, a real-estate expert at the Federal Reserve Bank of Atlanta, warned of big commercial real-estate losses and said banks will be slow to recognize the severity of those losses, according to a presentation to bank regulators reviewed by The Wall Street Journal.

    More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks and vacancy rates in the apartment, retail and warehouse sectors have already exceeded levels seen in the real-estate collapse of the early 1990's, the newspaper noted.