SKYWALKER 2046

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Nobody Knows What Bank Stocks Are Really Worth 2009/04/22

First-Quarter Results Are A Mixed Bag

Bank and “investment firm” earnings have been a mixed bag. Through yesterday evening, 10 S&P 500 banking companies topped estimates and 7 missed.

This morning, Morgan Stanley (MS) increased the number of disappointments to 8, joining other firms such as First Horizon National (FHN) and Comerica (CMA).

To be fair, Wells Fargo (WFC) beat by 18 cents, so we could change the score to 11 beats and 8 misses. Even with the changes, it is still a mixed bag.

Bank stocks had rallied over the past several weeks, due in part to speculation that first-quarter earnings would be better than feared. Several banks preannounced that they were enjoying good first quarters. Thanks to the Treasury and the Fed, money was cheap. Changes to FASB rules allowed banks to adjust their toxic assets. Not to mention that lenders were very choosy about their borrowers.

Yet, the realities of the current economic crisis and the mistakes of the past continue to haunt the financial sector. And brokerage analysts remain fearful about further quarters of poor earnings.

Even Positive Surprises Are Not Leading To Higher Forecasts

Even for firms that topped expectations, changes to full-year forecast are not optimistic. Though there have been some positive revisions, the majority of covering analysts are keeping their forecasts unchanged or are cutting them further.

Consider these examples:

  • BB&T (BBT) earned 48 cents per share, 15 cents better than expected. Since the positive surprise, the full-year consensus earnings estimate has fallen 3 cents to $1.47 per share. Though 7 analysts have raised their projections, 6 others cut. Nearly half of the covering analysts have left their projections unchanged.
  • Citigroup (C) generated a better-than-feared loss of 18 cents, 6 cents narrower than the consensus estimate. Just 2 of the 15 covering analysts raised their full-year forecasts during the last 7 days, whereas 4 lowered their projections. (Eight others have not changed their forecasts.) The average full-year projection now calls for a loss of 40 cents, 3 cents wider than a week ago.
  • JPMorgan Chase (JPM) beat by 9 cents with adjusted profits of 40 cents per share. Despite the positive news, the full-year consensus earnings estimate has since fallen by 2 cents to $1.51 per share. Though 5 analysts did raise their projections, 4 others cut. More than half have not made any changes.

In all 3 cases, the positive earnings surprise did not result in higher earnings estimates. This suggests that brokerage analysts do not view last quarter’s positive trends as sustainable.

There is a reason for this. Even with the new FASB rules, the amount of write-downs will increase. The ending of the temporary moratorium on foreclosures, rising credit card default rates and higher unemployment will all have a negative impact on earnings. Further, the ability to borrow at ultra low interest rates will end at some point.

To be fair, it is very possible that some of the covering analysts have yet to adjust their full-year forecasts in response to the first-quarter earnings. Nearly all of the bank results have been released within the past 7 days.

On the other hand, there has been a sustained trend of negative estimate revisions for the financial sector that has lasted more than a year. Given the poor economic backdrop, the ongoing risk that an acceptable solution to the toxic asset problem won’t be found, the threat of further share dilution, and the government’s ever-evolving bailout plan, nobody really knows what banks will earn this year.

Nobody Knows What Banks Stocks Are Really Worth

The lack of a clear sense of what earnings will be combined with questionable balance sheets have made it impossible to assign a value to banking stocks. Brokerage analysts simply have no idea what a proper price target should be and neither does anybody else.

The fact that there isn’t a clear exit plan out of TARP only adds to the uncertainty.

This is why bank stocks continue to trade based on sentiment, and not fundamentals or chart patterns. Bluntly put, the short-term risks of trading banking stocks remain extremely high.

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