After three better-than-expected bank earnings announcements, investors are beginning to act as though the worst is over for the financial crisis. Are these earnings reports based on one-time events or a fundamental improvement in the business climate and those banks' strategies? A bit of both. There is a significant amount of one-time gimmickry in the numbers coupled with trillions in capital and big interest rate cuts from the U.S. intended to help banks rebuild their capital.
Here are the numbers for three such banks:
- JPMorgan Chase (NYSE: JPM) earned $2.1 billion worth of net income, or 40 cents a share, which was 8 cents a share more than analysts had expected, but down 40% from last year. JPMorgan took a $6 billion charge for bad loans and set aside another $4.2 billion in provision for more bad loans. The good news was profits from near 0% interest rates and trading gains. JPM's stock is up a mere 3% so far in 2009 and it has no plans to repay its $25 billion piece of the TARP.
- Goldman Sachs Group (NYSE: GS) reported $1.8 billion in profits, which excluded the orphan month of December in which Goldman lost $780 million. Most of the earnings came from trading gains, while its other units were less than stellar. Its stock is up 44% so far in 2009 and it raised $5 billion to repay its $10 billion piece of the TARP.
- Wells Fargo (NYSE: WFC) made a $3 billion profit on the strength of the refinancing boom triggered by low interest rates. Its stock has tumbled 34% so far in 2009 and it has said that it would like to repay its $25 billion piece of the TARP but will wait for the U.S. to give it permission to do so. However, Wells' results may be a one-time event since it is likely that most of the people who could qualify for a refinancing already have done so.
Then there is the little matter of FAS 157-e, which lets banks raise the stated value of their so-called Level 3 assets -- those that don't have an active market. I calculated that the 19 financial institutions undergoing stress tests had $608 billion worth of such assets at the end of 2008.
My guess is that the number will be much higher when the first quarter 2009 results are all out. That's because FAS 157-e lets the banks value those assets however they please. While many banks will take advantage of this new rule in the current quarter -- that too may be a one-time event.
Moreover, the other shoe is starting to drop. With today's $25 billion bankruptcy filing from the second largest mall operator, General Growth Properties (NYSE: GGP), many banks will be writing off their exposure to this and other commercial real estate firms likely to file for bankruptcy given that the vacancy rate in 1,500 malls across the country is at 7.1% -- the highest in a decade.
And this does not even take into account what could happen to banks' holding loans for leveraged buyouts that are deeply underwater.
Have banks bottomed out? Not bloody likely.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns stock in Wells Fargo and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
4-16-2009 @ 11:52AM
JCH said...
The FASB correctly repaired a very defective Mark to Market rule.
The CFO of Goldman Sachs said that no illiquid assets were marked up, and that some illiquid assets suffered continued write downs. That does not preclude "gimmickry", but it definitely constrains its possibilities.
Lost in all of this is the horrendously incorrect assumption that Mark to Market correctly valued assets last fall. It failed miserably at valuing assets last fall. It was a wild-assed overshoot. If the artillery spotter calls back that your round went three miles past the target, do you adjust the artillery piece, or just keep lobbing rounds out into the middle of nowhere just for the sake of misplaced accounting purity?
Mark to market had to be adjusted (repaired). To not see that is just plain stupid.
4-16-2009 @ 12:09PM
Iridium said...
How about the banks just open all the books for everyone to see. How about some transparency.
As long as there are secretive accounts and backroom accounting tricks we will never get a true picture of the health of the economy.
I love how the banks can just forget about a month here or there. Or take early writedowns to make the next quarter look better. It is a sick joke.
Again the answer to everything is to get rid of the exchange. Force all corporations private and forget about publicly traded stock. That is the only answer. You stay in business on the merits of your business, not how well you can leverage phony assets to prop up a P/E to increase your stock.