Lightning Won’t Strike for Banks Anytime Soon
06/24/2011 3:43 pm EST
Investors won’t get their next dose of bank earnings reports until JPMorgan Chase (JPM) releases second-quarter earnings on July 14, but earnings season is already looking awfully iffy for the big US trading banks.
Trading revenues are forecast to fall again for the quarter. That would mark the fifth straight quarterly year-over-year drop.
Revenue from fixed-income trading at US banks will fall 30% from the first quarter, according to a report from Citigroup (C) this week. Revenue from equity trading will drop by 15%.
Total trading revenue at the five biggest Wall Street banks—Goldman Sachs (GS), JPMorgan Chase, Bank of America (BAC), Citigroup, and Morgan Stanley (MS)—may drop 4.4% in the second quarter of 2011 from the second quarter of 2010, and 17% from the first quarter of 2011, according to a report by Oppenheimer & Co. Trading accounted for almost a quarter of these banks' revenues last year.
Analysts have been busy cutting their earnings estimates for the group—according to Bloomberg, seven analysts have cut their earnings estimates for Goldman Sachs and Morgan Stanley, for instance, in the last four weeks.
So the question for earnings season will be, have the stocks fallen so much—10% or more since March 31—and have estimates come down so much that bank shares will actually rally on just the expected degree of bad news?
In an earlier quarter—say the last quarter of 2010—I would have voted for “Rally on the bad news.” But I think that’s unlikely this quarter.
- In the last quarter of 2010, bank stocks climbed on lackluster revenue growth, as investors rewarded shares for a fall in reserves against bad loans that put cash back into earnings that had been taken out earlier.
- In the first quarter of 2011, however, investors started to ask, “Where’s the growth?” and punished bank shares because of falling trading revenue and a lack of growth in loan portfolios. It was the lucky bank that managed to report any loan growth at all for the quarter.
With both loan growth and trading revenue likely to be anemic or worse this quarter, I don’t think investors will leap at a chance to buy big money-center bank stocks just because the news isn’t worse than expected.
Especially when this is the same part of the banking sector that is facing higher (but still undefined) requirements for extra capital under the Basel III regulations, set to be announced in November.
If you’re looking for bank stocks that will outperform the group, I’d cast my eye on:
- the super-regionals that showed loan growth last quarter—such as US Bancorp (USB);
- or that have a good cost-cutting story to tell—such as PNC Financial (PNC). US Bancorp is a member of my Jubak’s Picks portfolio.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Morgan Stanley, PNC Financial, and US Bancorp as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.