Wall Street analysts like Barclays Capital’s Jason Goldberg went into the new year predicting that bank earnings will jump in 2012 – and now that biggest in the business have all reported their earnings for the fourth quarter of 2011, the numbers suggest there’s at least some hope of that happening. But while the results were often encouraging, it’s still too soon to say that bank earnings are really set to soar this year.
Bank of America (BAC), for example, reported last week that it closed out a brutal 2011 on a strong note, posting a fourth-quarter profit of $2 billion, or 15 cents a share, and quickly bolstering its balance sheet to ease fears that it might not survive. It was just one month ago that Bank of America shares dipped into penny-stock territory, briefly falling below $5. But the stock has climbed more than 45 percent since then, including a spike of more than 4 percent on Thursday morning as investors cheered the most recent report.
And yet Deutsche Bank analyst Matt O’Connor noted that it’s “difficult to see” the earnings power of the bank “given weak capital markets revenues, a bloated cost structure and lots of moving items.” O’Connor expects Bank of America to post 2012 full-year earnings of 57 cents a share.
JPMorgan Chase (JPM) CEO Jamie Dimon, a relentless cheerleader for the industry and particularly for his own institution, took pains during his conference call with analysts to accentuate the positive despite lower-than-expected revenues. Companies are rebuilding inventories – that’s a positive sign for both the economy and the banks that will be called upon to finance that, he argued. Meanwhile, the rate at which beleaguered consumers are defaulting on their debt – from secured mortgages to unsecured loans and credit card debt – is falling. That translated into a larger-than-expected cut in the bank’s loan-loss provisions.
But “less bad” is still not the same as “good.” There’s a difference between improved profits that result from cost-cutting and lower taxes, as was the case with Goldman Sachs (GS), and genuine growth from operations. And there’s a difference between an upbeat analysis for bank stocks based on the fact that there’s less bad news – for instance, that there are fewer bad loans or that stock markets become less volatile – and one that is based on a genuine improvement in fundamentals.
For instance, in order for banks to post a sustained recovery in earnings, something needs to change to make their operations more profitable. Perhaps a new product makes its debut? Or perhaps there’s a recovery in lending activity, or higher interest rates?
For the latter two to manifest themselves, the economy would need to be significantly stronger than it appears today. True, unemployment rates are edging lower and consumer confidence is growing. But last week’s release of economic data showing that the trade gap widened in November suggests that an economic recovery may not be as robust or sustainable as bulls hope. In that case, it’s hard to see how banks can significantly expand their lending – a ho-hum recovery, after all, has implications for the demand for credit on the part of businesses as well as the judgment as to how many would-be borrowers are deemed creditworthy.
On the investment banking side, the harsh reality is that Wall Street remains under siege. In that context, the announcement that two senior trading execs are leaving Goldman Sachs isn’t that surprising: Traders there, and other firms, have been grumbling for months now about new and more restrictive risk limits and the new regulatory environment. Don’t be surprised to see the duo return quickly to Wall Street at the helm of some next-gen proprietary trading or market-making business.
Still, analysts remain oddly bullish on Goldman Sachs, which said that its fourth-quarter profit plunged 56 percent, but it still managed to beat analysts’ modest expectations. With the stock now trading just below $110 a share – up from a 52-week low of $84 – the median analyst forecast calls for it to reach $125 a share, with at least one bull saying it could rebound to $180 a share. At the moment, it’s hard to see where the positive impetus for such a major uptick might come from.
Investors in B of A, JP Morgan, Goldman Sachs and other financial institutions are all looking for evidence of some fundamental and durable improvement in the their results – and so far, they are looking in vain. Investors prize what’s known as “visibility,” and given the volatility in the financial markets and the macroeconomic clouds hovering over Europe – not to mention the new regulatory constraints – the outlook for profits in the sector this year remains decidedly murky.
