Do We Cheer Banks’ Earnings?

By Zacks Investment Research on July 20, 2009 More Posts By Zacks Investment Research Author's Website Last week, after a round of “positive surprises” delivered by some of the major banks, we had “not so surprising” news of closure of five more banks, bringing to 57 the number of federally insured banks closed this year। It appears that the divide in the banking landscape between the “haves” and “have-nots” is increasing। Even among the big banks, there is now a clear two-tier system. On one hand, we have Goldman Sachs (GS: 158।31 -1.72 -1.07%) and JP Morgan (JPM: 36.80 -0.18 -0.49%), which delivered record profits from their trading and investment banking revenues. There is no doubt that these two managed their affairs well, have increased their market share after the collapse of Lehman and Bear Stearns and also have benefitted tremendously from the various programs by the Treasury and the regulators. And, we should not forget the generous AIG (AIG: 13.42 -0.04 -0.30%) payout to Goldman. On the other hand, the second-quarter profits of Bank of America (BAC: 12।01 -0.23 -1.88%) and Citigroup (C: 2.6703 -0.1197 -4.29%) were reliant on several one-time gains, resulting from asset sales etc, while weaknesses in some businesses and continued credit deterioration showed that there is more pain to come. Bank of America’s credit-card unit lost $1।6 billion amid rising delinquencies, compared with a year-ago profit of $582 million. Its home-loan and insurance unit lost $725 million. The bank reported $8.7 billion in credit losses, up from $3.6 billion in the year-ago quarter. Its nonperforming loans jumped to 3.3%, up from 1.1% a year ago. Like Goldman and JP Morgan, Bank of America’s results were aided by strong investment-banking and trading income following the merger with Merrill Lynch। But Citigroup saw decline in investment banking profits and it appears to be losing market share to stronger rivals. Citigroup reported $8।4 billion in net credit losses, nearly double the loss from a year ago. Incidentally, the CEO of Citigroup — after the bank had posted a sixth quarter of loss ($2.4 billion net loss on operational basis) in the last seven quarters — sounded most optimistic during the conference call, saying “the rate of growth in these consumer losses may be moderating.” Obviously he was trying to put on a brave face as the bank still faces an uncertain future. With spiking unemployment, these banks will face increasing credit card losses। Housing and Commercial Real Estate prices are still on a downward spiral and will cause more losses in the coming quarters. On the other hand, mortgage refinancing, which was one of the main reasons for supporting the revenues in the last two quarters, is expected to taper off as the rates are creeping up now. The smaller banks that do not enjoy the privilege of being “too big to fail” continue to struggle. The regulators shut two banks in California and two smaller banks in Georgia and South Dakota on Friday (something that has become the rule rather than the exception for Fridays). The 57 bank failures this year compare with 25 last year and just three in 2007. The latest round of failures is expected to cause a loss of $1.1 billion to the FDIC and bring the total cost of failures this year to $13.4 billion. And unfortunately, this trend is expected to continue for some time.