Earnings season begins tomorrow for U.S. banks, and the consensus opinion is that the top banks' performance will do nothing to lift the pall that hangs over them. However, as we look beyond the second quarter (and beyond 2011), there is reason to believe the sun will shine on bank share investors.
The hits keep on coming
The latest concern to hit the top banks relates to declining trading revenue. With the exception of Wells Fargo
% Revision in Q2 Earnings-Per-Share Consensus Estimate, Last Week
Price-to-Tangible Book Value*
Bank of America
Source: Capital IQ, a division of Standard & Poor's. *As of July 8. **Weighted by market capitalization.
With regard to full-year earnings, this group has suffered continual downgrades over the past month (again with the exception of Wells Fargo). As a result, my basket trade idea, which was outperforming the market during the first quarter, is now in the red, lagging the market by a substantial margin. While there remains uncertainty regarding financial reform and the costs due to soured mortgage securitizations, I think the market may be underestimating the significance of one key matter that was largely settled last month.
An opportunity for patient capital
Minimum capital requirements affect banks' long-term earnings power, and while there will be no returning to the "performance-enhanced" profitability of the credit bubble, the new, stricter requirements still leave room for banks to earn returns in excess of their cost of capital. Despite that, the group trades at a modest premium to tangible net asset value (a measure of the bank's accounting net worth, which excludes intangible assets including goodwill), suggesting the group represents an opportunity for patient capital.
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Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.