The investing world on Wednesday will hear for the first time from newly minted CEOs at two banking giants -- Brian Moynihan of Bank of America (BAC) and James Gorman of Morgan Stanley (MS). Both will likely lay out their vision and talk to investors about their strategies as they confront an uncertain economic recovery.Bank of America, Wells Fargo (WFC) and Morgan Stanley are all set to report earnings on Wednesday. According to Thomson Reuters, analysts are expecting losses from both the large consumer banks. Bank of America is expected to post a loss of 52 cents a share from while a loss of 2 cents from Wells is forecast.
TARP Leads To Red Ink
The red ink is largely related to expenses tied to their repayments of the government bailout under TARP, or the Troubled Assets Recovery Program. Morgan Stanley is expected to post net income of 37 cents a share.
Despite a negative headline number for the two large retail banks, investors will closely watch to see how each managed their large home home-mortgage lending businesses. Vivek Juneja, an analyst at J.P. Morgan Chase (JPM) expects loan losses from residential real estate loans to continue to remain high. However, he expects that both Bank of Ameica and Wells likely also wrote a lot of new mortgages when rates hit a low early in the quarter.
"Average (mortgage refinance) applications rose 12% in 4Q ...due to lower rates," said Juneja. He did warn that a drop in home purchases will likely hurt these banks in the first quarter of 2010.
New Earnings Road Map
At Morgan Stanley, CEO Gorman is expected to draw a new earnings road map for the coming months from the bank's newly expanded business. The New York investment bank is now the largest brokerage in the U.S. with the purchase of Smith Barney from Citigroup (C) last year. And although investment banking activity fell in December, improvement in the equity and fixed income markets in the previous two months of the quarter could help boost earnings at Morgan Stanley.
Juneja also expects high investment banking fees related to new IPOs and high-yield bond issues to boost Bank of America's earnings.
Bank of America shareholder Michael Nix, a portfolio manager at Greenwood Capital Associates, believes that it all comes down to execution for new CEO Moynihan. Nix says the Merrill Lynch merger is already proving to be a good acquisition, as investment banking and broker fees are have added to both revenue and income in the past two quarters.
Pressure On Credit Cards
"The only other big thing weighing on the bank is the regulatory environment and the outstanding litigation from regulators over the Merrill deal," says Nix.
Credit cards, a large business at Bank of America, will likely continue to be pressured from weakened consumer spending and a high unemployment rate. Jason Goldberg at Barclays notes that net charge-offs rose for the eighth straight quarter in the third quarter at Bank of America, and will watch closely for signs of improvement in the default rate as the economy recovers.
New BofA, Morgan Stanley CEOs Expected to Discuss Strategy, Vision