A Disappointing First Half for Big Banks

All of the major Wall Street banks, with the exception of Morgan Stanley (NYSE: MS), beat analyst expectations in terms of earnings per share for the second quarter of 2012.

But are these results a reflection of good performance by the banks, or poor performance by the analysts?

While I apologize to any analysts reading this, I'd say the latter, as the year is shaping up to be an extremely difficult one for the financial industry.

Let's start at the top line
Revenues at the major banks were abysmal. According to Bloomberg, the $161 billion combined first-half revenue from the five biggest Wall Street banks (San Francisco-based Wells Fargo (NYSE: WFC) excluded) was the worst since 2008, the low point of the financial crisis.

The hardest hit were the traditional investment banks. Hurt by a decrease in trading and dealmaking activities, Morgan Stanley and Goldman Sachs recorded double-digit declines of 17.3% and 13.5%, respectively, leading Goldman's chief financial officer, David Viniar, to note: "While we're trying to pare down and perform as well as we can in this difficult environment, [these are] not returns that are acceptable to us or our shareholders, and we know that."

Source: Second-quarter financial supplements.

Now to the bottom line
The situation was the same on the earnings front, as all but Bank of America and Wells Fargo reported year-over-year reductions in net income for the first half of the year -- by the way, B of A's increase was due to a multibillion-dollar writedown related to mortgages in 2011.

Source: Second-quarter financial supplements.

Again, the bottom lines of the traditional investment banks were the hardest hit, with Morgan Stanley and Goldman Sachs posting declines of 65% and 20%, respectively, for the first half of the year. According to a research note by Meredith Whitney, of namesake Meredith Whitney Advisory Group: "It can't be much fun to be a shareholder of Morgan Stanley, and things got a lot worse this past June when Moody's downgraded the company's to one of the lowest ratings of its competitors."

The operations with larger traditional banking units, on the other hand, were able to offset losses from trading and dealmaking. And Wells Fargo even posted a double-digit increase on the back of increased mortgage underwriting.

It's not all bad news
Despite these results, the news from the financial sector isn't all bad. All of the banks increased their tier 1 common capital ratios from the same period last year, evidencing a strengthening of balance sheets in the industry, and moving many of the institutions closer to getting the Federal Reserve's approval to up their dividend payments.

Source: Second-quarter financial supplements.

What's more, each of the banks are aggressively working to reduce expenses. Among others, Goldman will seek an additional $500 million in savings by year's end, Morgan Stanley is planning on cutting an additional 700 jobs, and Bank of America is essentially reworking the entire expense side of its balance sheet through the aptly named Project New BAC. We'll know more regarding how successful they are over the upcoming months.

Is it time to buy bank stocks?
While I often go back and forth on this question, one thing is certain: As a consequence of their recent performances, big bank stocks are cheap. Really cheap. It's my opinion, in fact, that we're seeing price-to-book ratios for firms like Bank of America, the cheapest of the bunch, that we may not see again for decades.

According to our banking analyst's recent in-depth market report on Bank of America: "for investors who are comfortable taking the real risk of up to 100% loss of capital, today's prices are attractive and could result in a double or triple within the next five years." I think that about sums it up.

To see why this is so, and find out what you need to know about the banking industry today, read this timely report before the market catches on.