May 2, 2008
This week featured economic news, more earnings surprises, and enormous capital raisings. Many of the nation's banks are still coping with deteriorating balance sheets while the economy seems to be avoiding recession.
Here are some banking snippets for the week.
- Visa (NYSE: V ) and MasterCard (NYSE: MA ) posted phenomenal earnings and beat expectations in a miserable market. The stocks continue to defy gravity by constantly rising to new heights, despite already lofty valuations. The credit card companies are growing and profiting as if the economy were booming, while many major banks are struggling to raise capital and stay solvent. Way to show Wall Street what a real financial company can do.
- Citigroup (NYSE: C ) announced that it will raise an additional $4.5 billion of capital through an equity offering of common stock. This will dilute the holdings of shareholders who have already seen their shares halved in price over the last year and their dividends cut by 41% in January. With this offering, Citigroup will have raised $40 billion in capital in the last six months. Can Citigroup ever raise enough to support the weight of its past sins?
- The Fed cut the discount rate one-quarter point on Wednesday. After cutting rates for the seventh time in eight months, for a total decrease of 3.25%, the Fed signaled that it might be done cutting. The Fed report omitted a key phrase, "downside risks to growth remain." Many took the omission as a signal that the Fed thinks that the economy probably won't get any worse, and the markets rallied. That's fine. Rate cuts are for squares anyway.
- Morgan Stanley (NYSE: MS ) analysts slashed 2008 earnings forecasts for financial stocks by 26% and told clients to "sell the rally." They also said that we are in only the third inning of the credit crisis, warning of more capital increases and dividend cuts to come. Geez, one group of analysts is certainly grouchy this week. Who needs a hug?
- Countrywide Financial (NYSE: CFC ) has managed to tarnish its already subterranean reputation by announcing much-worse-than-expected earnings. The nation's largest mortgage lender, which is being acquired by Bank of America (NYSE: BAC ) , announced a loss of $1.60 per share, which didn't even come close to analyst forecasts of positive $0.02 per share. The company said that almost 36% of its subprime mortgages were in delinquency. Way to be a poster company for subprime overindulgence!
The banking industry may have seen the worst of the crisis and narrowly avoided catastrophe. But huge write-offs, bad earnings, massive capital raisings, and dividend cuts will likely continue for many major banks in the foreseeable future. Things may not get worse, but there is a long way to go before things are good again for most banks.