Banks and financials start reporting next week. Obviously the flattening yield curve and slow down in refis is going to hurt them. The refi slowdown mostly occurred on Dec, as did the biggest narrowing of the yield curve. I calculated that the the overall MBAA refi index in Oct-Nov was 2072. It dropped to 1883 in Dec. First two weeks in Jan. it was 1711, so the industry is doing a fast fade on business. It may really start showing in Feb. when outfits like CFC report January operational results. The 2 year spread was still 158 on Oct. 1, 150 on Nov. 1, 137 on 12-1, and 116 on 12-31. It's 99 now, but the quarter being reported is over, so again maybe only Dec was rough. I keep coming back to Dec. 8th as the tipping point.
treas.gov
Contrary Investor has an informative latest issue out describing on these guys lost money on derivative trading in the 3q, and the diminishing returns. In otherwords the insurance bill from the prior lower trending interest rates is coming due. Next is bad loans?
U.S. bank profits seen rising; drivers may change
Fri Jan 14, 2005 01:15 PM ET
By Jonathan Stempel
NEW YORK, Jan 14 (Reuters) - The U.S. consumer, long a key driver of banks' profits, look ready to start passing the baton to corporate borrowers as the biggest financial institutions report fourth-quarter results next week.
Many U.S. banks benefited from rising stocks and increased investment banking activity, analysts said. Corporate customers, meanwhile, are borrowing more to fund expansion and mergers as the economy grows.
"Companies are more open to booking loans, and the capital markets environment for banks is better than many people believe," said Tim Woolston, who helps invest more than $5 billion for Boston Advisors Inc.
Banks may need more corporate loans to offset any plateau in consumer borrowing.
"Consumers have really exhausted their demand for taking down additional debt," said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP in New York. "That could create challenges for many banks."
Two top-20 banks have already reported results. M&T Bank Corp. of Buffalo, New York, said profit rose 15 percent, but consumer loan growth flattened. BB&T Corp. of Winston-Salem, North Carolina said operating profit rose 10 percent, as nonlending fees increased.
In a recent report, Lehman Brothers Inc. analyst Jason Goldberg estimated that earnings at 43 banks he covers rose 10.5 percent from a year earlier, with gains at 36 companies and declines at seven.
Bank of America Corp., Wells Fargo & Co. and U.S. Bancorp plan to report results on Tuesday, J.P. Morgan Chase & Co. and Wachovia Corp. on Wednesday, and Citigroup Inc. and SunTrust Banks Inc. on Thursday.
Washington Mutual Inc., the largest savings and loan -- and bigger than all but five other banks -- reports on Wednesday.
RATE-READY?
Analysts will look for how well banks are handling interest rate changes.
Fearing competition, banks are paying more on deposits even as they keep rates low on long-term loans, hurting margins.
Although the Federal Reserve has increased short-term rates five times since June, with more hikes widely expected, long-term rates have changed little. This creates a "flattening" yield curve.
"A flatter yield curve probably hurts everybody in the banking industry," BB&T Chief Executive John Allison said on Friday, after his bank reported shrinking quarterly margins.
Bad rate bets can also cause securities that banks own to lose value. Fifth Third Bancorp, which reports on Tuesday, is taking a $340 million charge to restructure its balance sheet.
"For companies that rely on large securities portfolios, the flattening curve is a challenge, and I'm avoiding them," said Anton Schutz, who runs the $220 million Burnham Financial Services fund (BURKX.O: Quote, Profile, Research) .
On a more positive note, the improving economy means fewer bad loans, and banks may free up cash they set aside for them. This may burnish profit but reduce earnings quality in Wall Street's eyes because these "reserve releases" are one-time events.
Meanwhile, low borrowing costs, more mergers and an increase in stock offerings might help big investment banks such as Citigroup, J.P. Morgan and Bank of America.
"I like the investment banks," Schutz said. "We are having capital formation, there are IPOs, and it's definitely going to be a big year in mergers."
Rising stocks also might help the servicing businesses of such big fiduciary banks as Bank of New York Co. and State Street Corp.
MERGERS?
Cost-cutting may also be a theme. J.P. Morgan and Bank of America together are eliminating 29,000 jobs. Meanwhile, Wachovia has yet to detail a planned $1 billion of cost cuts.
And while the worst of the mortgage refinancing slowdown is probably past, analysts will eye the health of such big lenders as Wells Fargo, National City Corp. and Washington Mutual.
Although the Philadelphia KBW Bank Index lagged the Standard & Poor's 500 in 2004, analysts call many bank stocks, which often throw off good dividends, fairly valued.
Some analysts say Citigroup's stock looks undervalued because investors fear the bank is overexposed to litigation and regulatory problems because of its massive size.
But some banks stocks might rise quickly if the sector participates fully in corporate America's urge to merge.
Smaller banks need to consider mergers, Boston Advisors' Woolston said. "There are still too many banks out there," he said. "They will need greater heft to compete, or else be forced out of business."
The following are the largest U.S. banks and their expected fourth-quarter profit per share, according to Reuters Estimates data as of Friday. Company Q4 2004 Q4 2003 1. Citigroup Inc. (C.N: Quote, Profile, Research) , New York $1.01 $0.91 2. J.P. Morgan Chase & Co. (JPM.N: Quote, Profile, Research) , New York $0.69 $0.89 3. Bank of America Corp. (BAC.N: Quote, Profile, Research) , Charlotte, North Carolina $0.94 $0.92 4. Wells Fargo & Co. (WFC.N: Quote, Profile, Research) , San Francisco $1.06 $0.95 5. Wachovia Corp. (WB.N: Quote, Profile, Research) , Charlotte, North Carolina $0.98 $0.88 6. US Bancorp (USB.N: Quote, Profile, Research) , Minneapolis $0.57 $0.50 7. SunTrust Banks Inc. (STI.N: Quote, Profile, Research) , Atlanta $1.27 $1.21 8. National City Corp. (NCC.N: Quote, Profile, Research) , Cleveland $0.66 $0.88 9. Fifth Third Bancorp (FITB.O: Quote, Profile, Research) , Cincinnati $0.29 $0.80 10. State Street Corp. (STT.N: Quote, Profile, Research) , Boston $0.58 $0.71 11. BB&T Corp. (BBT.N: Quote, Profile, Research) , Winston-Salem, North Carolina $0.75* $0.69 12. Bank of New York Co. (BK.N: Quote, Profile, Research) , New York $0.48 $0.44 13. KeyCorp (KEY.N: Quote, Profile, Research) , Cleveland $0.62 $0.55 14. Regions Financial Corp. (RF.N: Quote, Profile, Research) , Birmingham, Alabama $0.59 $0.59 15. PNC Financial Services Group Inc. (PNC.N: Quote, Profile, Research) , Pittsburgh $1.03 $0.99 * Actual |
