Bank earnings beat expectations, but are they sustainable?
Filed under: Company News, Earnings, JP Morgan Chase
Earnings at most big banks outpaced expectations in the third quarter. Some banks, like JPMorgan Chase (JPM) and Wells Fargo (WFC), could even brag that they'd brought in record income so far this year. But for many investors, the question is whether better-than-forecast results are sustainable.When it appears they aren't, things can take a turn for the worse in a hurry. While bank stocks recovered on Thursday, they fell significantly a day earlier when veteran banking analyst Richard Bove at Rochdale Securities cast doubt on Wells Fargo's chances to repeat its strong performance and recommended clients sell the stock as a result. Within moments of Bove's recommendation, the S&P 500 had fallen by 1.5 percent.
Bove's market-moving insight? Financial arrangements designed to protect Wells Fargo from a fall in revenue from mortgage servicing fees were bringing in huge amounts of money. In fact, they had become "the most compelling earnings event in each quarter," he wrote in a research report. Meanwhile, "the remaining business of the bank was very mixed," he added.
"It does not appear the bank can sustain the third quarter's results," Bove wrote. "I would avoid this stock."
It probably didn't help that Bove had been on CNBC that same morning touting Wells Fargo's stock after it reported a third-quarter profit that far exceeded most analysts' estimates. (He subsequently told Dow Jones Newswires that he'd no longer make such appearances, adding that his comments came before he had "a chance to take a good look at the numbers.")
But Bove is far from the only analyst casting doubt on Wells' performance on such grounds. David Hendler, a debt analyst at CreditSights, wrote that the lender's "machine may be out of gas" as non-performing assets (those that are delinquent and no longer accruing interest) jumped in the quarter by more than any of its rivals.
So it's not too surprising that investors have been skeptical. Wells Fargo's shares have fallen about one percent since its earnings announcement on Wednesday morning, compared with a one percent gain for the financial companies included in the S&P 500.
Nor is Wells Fargo unique in this regard. David Konrad, a banking analyst at Keefe Bruyette & Woods, a New York investment firm that focuses on the financial industry, cited government involvement, shareholder dilution and potential losses on toxic assets as big reasons why better-than-expected results at Citigroup (C) were unlikely to be repeated.
Citigroup's stock has fallen 10.8 percent since reporting its third-quarter results last Thursday; the S&P 500 was little changed over the same period.
Meanwhile, JPMorgan, a company about which investors appear to harbor few doubts, has climbed 0.11 percent since announcing record quarterly revenue of $28.8 billion on Oct. 14. And it would be up even more if not for Wednesday afternoon's sell-off -- which just shows how pervasive doubts about sustainability can be.
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Reader Comments (Page 1 of 1)
10-22-2009 @ 6:38PM
cabo79 said...
I will believe they are doing well when the dividend checks are back to where they were. Until then I will stay away from bank stocks.
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10-22-2009 @ 7:17PM
RJ said...
JP Morgan Chase has a BIG problem with its credit card division. Basically they "Screwed" many long time customers and consumers. Just wait until the earnings come out for the next couple of quarters. It is going to be BAD.......
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10-22-2009 @ 7:37PM
J Schottenstein said...
Isn't this just like when DSW got sued for ID and social security theft and used "UBIZEN" to investigate, one of their own?....... Don't forget OSU too.....
http://columbus.bizjournals.com/columbus/stories/2009/10/19/story9.html?t=printable
"Friday, October 16, 2009
Schottenstein-owned chain sues ratings agencies over $70M lossBusiness First of Columbus - by Kevin Kemper
A year after the near collapse of the financial system from wounds inflicted by risky mortgages, a Columbus furniture chain is attempting to recoup a multimillion-dollar loss by suing two of the leading securities-ratings agencies.
American Signature Inc. and SEI Inc., an affiliate, have filed a lawsuit that attempts to hold Moody’s Investors Service Inc. and Standard & Poor’s Financial Services LLC to account for classifying subprime mortgage-backed securities as safe investments. By relying on those ratings, the lawsuit alleges, American Signature has been left with a stack of worthless paper and a massive hole in its investment portfolio.
“Now that the true risks of those securities have been revealed by the exploding subprime mortgage crisis, plaintiffs are holding approximately $70 million worth of securities that are essentially worthless,” the lawsuit said.
While it has become clear that many subprime mortgage-backed securities were junk, securities law experts said American Signature faces a steep climb in proving its case.
614-220-5460 | kkemper@bizjournals.com
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10-23-2009 @ 7:15PM
David S. said...
I feel certain that we've got MBA Grads, at the top of their classes who could do the running of a companys running 'em into the ground, and collecting a cool Million dollars to do it. IN MY OPINION, they should get an allowance based on what they make in terms of a cool 100, 000 dollars. Because IN MY OPINION these guys don't deserve anymore than that. Theey fly around in company jets, dine at the top five star restaurants, vacation in luxury, while expecting the taxpayers to foot the bill, Right?? I could see the federal banking , and treasury czar taking interviews for their jobs, IF I WERE RUNNING THE SHOW. That's MY PERRSONAL OPINION. Speaking FOR MYSELF.
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10-22-2009 @ 11:25PM
David S. said...
COM'ON These guys are our best and brightest?? Now that's very scarry. O.k. Guys, yopu were kidding right? I mean, a cool Million dollar self given bonus on the taxpayers, ..... As the French would've probably.... ESCROOKS !! That's MY PERSONAL OPINION. Speaking FOR MYSELF.
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10-23-2009 @ 6:34AM
Tom said...
Wells Fargo has some problems but unlike many other large banks it has a conservative backgroud and is operated by conservative management. If I were to invest in a large retail bank it would be Wells.
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10-23-2009 @ 3:02PM
otrpu said...
Of course their profits are soaring, damn government letting them raise interest rates on card debt decades old. Suck you in with 3.5% for life, then April Fool, we changed our minds, and only way you can get outta it is pay off thousands of dollars now. This sucks. The crooks sucks, and this government sucks. Changing the law next year won't do a thing to keep them from killing present customers. Should have been retroactive to a month before they passed the law.
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10-31-2009 @ 4:28AM
olga lednichenko said...
Come on lets not bash the banks... lets see it this way..
[a] what is the defintion of failure ?
[b] who defines - who failed?
Past is the best indicator of the future. Looking at the history, we can conclusively, conclude that in both [a] and [b] above: the answers we got were:
1) Its not local stupid - its systemic -we are all in it together u see? lets save the titanic sort and the polticians explained it to the commoners in their kitchen table way -> i dont remember that bumper sticker - the varnish is off now -> oh yeah it was * TOO BIG TO FAIL* - now this is a 4 letter word.. how can u not memorize it.?
2) we are upgrading our ratings - from neutral to - attractive - and then later on -> buy to a strong buy -> yes.. its the smart money stupid - look at the momentum - the banks are up :)
and yes.. we are out of recession..
what do you mean you dont understand? oh.. i see - you didnt take econ? and u arent a banker either? - hmmmm// ok well.. you know" how is mom..,? " its .. its .. \well u know.. a cycle..
and then we the people - come back .. impressed - sometimes even in awe and admiration .. of those "smartest and the brightest - who got the mostest and the fastest* - yeah - got -the-green-backs - ie..
sorry i am from the streets - so.. its tube light - takes me time to comprehend the complex nature of our intertwined fates and markets and all that..
and you know.. :) - one of those -> so you think u know someone - who can help me - get a job i.e.?
oh well you know the recesioon is over - i mean.. but then.. there is this - well.. do you know economics?
:)
cheers
olag shulman lednichenko
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10-31-2009 @ 4:20AM
olga lednichenko said...
and please... i am sorry.. what is the definition of a bank?
i mean your question is /was -> banks..beat something and what not - but are they *sustainable*
can i - now - respond? i mean - my way : the dumb way of course..
so here is a fundamental question -> WHAT IS A BANK?
no its in my - small - mind - a fundamental question.. what is a bank?
now somehere i read - a company is not bricks - well, actually Jack Welch also says that many times .. so.. what is a company? - well.. a company is PEOPLE..
SO.. i wonder - what BANK =? and i have to conlude - BANK = PEOPLE..
now if bank = people.. who happen to gossip in enclosed rooms - aka - the building ..
then - let me do some math..
are bakers = people?
of course, everyone is different, some are smartest and the brightest and earn of the mostest.. but hey are they people?
so.. say if bankers = people..
then bank = bakers
so.. now your question - > are banks sustainable - can be equivalent to asking .. ?
oh yeah - i forgot - again - that definition os whats sustainable changes -and i wonder why = > do you know why? - please tell me.. i am 22 or 23 - i cant decide..
idont make sense.. but hey its math:
banks = people , people = banekrs
so.. banks = bankers
now.. yor question -> are banks = sustainable?
I dont know..
because I can only tell you - that IF bankers = sustainable..
yes.. so banks may or not be sustainable - but bankers sure are -> look Obama said -" there will be a time for bonuses" and you know - i heard - " the time has come"
Sacs at SIXTH
cheers
olga shulman lednichenko
ps: is bank = company..? I wonder because =- in company talk -> a company = not bricks - a company = people who help build or something of that sort..
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