Most major banks will report quarterly earnings over the next two weeks. JPMorgan Chase (NYSE:JPM). Citigroup (NYSE:C). Bank of America (NYSE:BAC). Goldman Sachs (NYSE:GS). Wells Fargo (NYSE:WFC). US Bancorp (NYSE:USB). They'll all be presenting us with a confusing mess of numbers.
Quarterly earnings are generally meaningless but easy to sensationalize. But you can still pick out long-term trends by spotting short-term shifts. Here are four things I'll be looking for over the next two weeks.
1. Dividends
Most banks that received TARP support from taxpayers saw the ax fall on dividend payouts to common shareholders. Some were legally barred. Others just slashed frantically.
But now that TARP repayment checks have been cut, the question is when and at what rate dividends will return. JPMorgan Chase is probably in a position to ratchet payouts back up. I wouldn't be surprised to see B of A do the same, even if it was just a token increase to show investors it still loves them.
Limitations on this aren't a matter of adequate capital or cash flow, but public criticism. Despite repaying TARP, the public is (rightly) infuriated that banks are drowning in profits based solely on loose monetary policy. Record bonuses are hard enough to justify. Are dividends too much of an added problem? Perhaps. We'll see.
2. Early-stage delinquencies
Early-stage delinquencies are cracks in the foundation prone to spread into real losses. This is probably the single most important metric in determining a bank's future profits.
Some areas have shown improvement over the past two quarters. But where there was improvement, it was meager. FDIC data gathered by the website WLM Lab shows the industry-wide trend for all loan categories still rising:
|
Q4 2008 |
Q1 2009 |
Q2 2009 |
Q3 2009 |
|---|---|---|---|
|
3.23% |
3.50% |
3.46% |
3.74% |
This isn't surprising: As long as unemployment lines stay long, delinquency rates of things like credit cards, auto loans, and mortgages will tick higher. And as long as early-stage delinquencies are moving higher, pulling significant earnings out of loan-based assets is fictional.
I'd love to see overall early-stage delinquencies drop by 50 basis points before getting excited. If they continue to fall for two or three more quarters, go ahead and declare victory.
3. Say something smart about the carry trade
In an article titled "Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment," the FDIC recently warned, "Evidence suggests that more financial institutions currently are taking on higher levels of interest rate risk at a time when short-term rates are near historic lows, which could leave them significantly exposed to changes in interest rates."
That's exactly why I feel investors should be wary of Goldman Sachs' record earnings. Banks big into fixed-income trading have been creating money out of nothing with the "carry trade" -- borrowing money from the Federal Reserve at 0% and lending it back out to the Treasury at 2%-4%. It's nice work if you can get it. But complacent banks will get checkmated when short-term rates start to rise.
All banks have to do to ease investors' fears is follow Wells Fargo's lead and say something simple like, as The Wall Street Journal notes from a Wells report, "earnings would take only a 5% hit if the federal-funds rate rose to 3.75% and the 10-year Treasury yield jumped to 5.9% by September 2010."
Really simple. Just don't leave us wondering.
4. Individual tidbits:
- Many banks will have large one-time charges from repaying TARP in recent months. Headline profit numbers for these banks will be terrible. Ignore them. This is one of the few times when "one-time" charges are truly that.
- Bank of America and Morgan Stanley (NYSE:MS) both have new CEOs. I wouldn't be surprised if both companies wiped the slate clean last quarter and aggressively wrote down the value of questionable assets. This is the only quarter the new CEOs can report terrible numbers and say "I had nothing to do with it."
- Goldman Sachs and JPMorgan Chase need to show deeper revenue mixes than the past several quarters. Nearly all profits over the past year have come from one segment: fixed-income trading. The longer they keep that up, the easier it is to say they're sprinting toward the edge of a cliff.
What do you think about the banking industry going forward? Share your thoughts in the comments section below.
