Settlements, lower trading to hurt 2Q bank earnings
NEW YORK — The largest U.S. banks — from JPMorgan Chase to Bank of America — have been busy settling lawsuits with investors in the second quarter, casting a pall over their upcoming financial results.
Banks start reporting earnings on Thursday, with the healthiest of the large banks, JP Morgan Chase & Co.
Most Wall Street analysts fear that second quarter earnings will be hurt by settlements with investors over poor-quality mortgage and municipal bonds. There’s also been a slowdown in trading of stocks, bonds and other securities, which has led several banks to cut jobs. Investment bank Goldman Sachs Group Inc. has already informed the New York Department of Labor that it plans to eliminate 230 jobs beginning in September.
Keith Horowitz, a Citigroup analyst, warned that fixed income revenue at the country’s largest banks likely dropped 30 percent compared with the first quarter. He estimates equities trading declined 15 percent. Many investors have cut back on trading because of the uncertainty surrounding the European debt crisis. Both bits of bad news will hurt results at banks with large trading desks like Goldman, Morgan Stanley and Citigroup.
The results will also offer a snapshot of how consumers and businesses have fared as the economic recovery began to slow in May. They’ll show whether people and companies are paying their bills on time, taking out more loans and making more purchases with credit cards.
Few analysts believe general bank lending has recovered. As evidence, FBR Capital Markets analyst Paul Miller points to Federal Reserve data showing that total loans at commercial banks increased $37 billion since the beginning of the quarter, but are still down $139 billion from the year-ago period. Residential loans were down 2 percent from the year-ago period, and commercial real estate loans are down 8 percent.
Then there are the massive settlements banks agreed to in an effort to clear up problems leftover from questionable mortgages and investment banking deals. Among them:
— On June 29, Bank of America Corp. announced the largest bank settlement on record. It agreed to pay $8.5 billion to a group of investors for writing poor-quality mortgage bonds that were packaged and then sold as securities.
— On July 6, Wells Fargo & Co. agreed to pay $125 million to a group of pension funds and other investors to settle allegations the bank failed to warn them of the risks of poorly-written mortgage-backed securities.
— On July 7, JPMorgan Chase & Co. agreed to pay $211 million to government regulators and the Justice Department after admitting one of its divisions rigged dozens of bids to win business from state and local governments. That came after a $154 million settlement in June with the Securities & Exchange Commission over allegations the bank had misled buyers of complex mortgage investments.
Here is the consensus of bank analysts surveyed by FactSet, and highlights for each of the large banks:
— JPMorgan Chase will be the first bank to report earnings on Thursday. It is expected to earn $1.22 per share on revenue of $25 billion. Barclays Capital analyst Jason Goldberg said in a report that JPMorgan’s relative stability will help it gain market share from other banks. He also said lower losses will help the bank capture some profits by releasing cash from reserves it had set aside for loan losses.
— Citigroup Inc. reports on Friday. The New York bank is expected to report earnings of 96 cents per share on revenue of $19.8 billion. Morgan Stanley’s banking analyst Betsy Graseck expects Citi’s revenues from regular banking activities like writing loans and trading securities to be lower.
— Bank of America Corp. reports next Tuesday. Analysts expect the Charlotte, N.C. bank to report a loss of 86 cents per share on revenue of $19.6 billion. The bank has already warned that its massive settlement and related costs will mean a $14 billion charge in the second quarter. Bank of America has said it will report a net loss of $8.6 billion to $9.1 billion, or as much as 93 cents per share.
— Goldman Sachs Group Inc. also reports on Tuesday. It is expected to earn $2.43 per share on revenue of $8.2 billion. Citi analyst Horowitz reduced his estimates for Goldman’s earnings by 47 percent for the quarter because of weak trading.
— Wells Fargo & Co., also reports next Tuesday. The bank is expected to earn 69 cents a share on revenue of $20.4 billion. Wells has one of the largest mortgage origination businesses of all banks and will likely have benefited from lower mortgage rates in the second quarter, analysts say. Rates on 30-year mortgages hit an average of 4.5 percent in June, after reaching a 2011 high of 5.05 percent in February.
— Morgan Stanley, which is tentatively slated to report next Thursday, is expected to earn 37 cents a share on revenue of $8 billion. Horowitz also lowered his expectations for Morgan’s earnings by 27 percent. He hopes that the bank’s results will show that lower revenue from trading was offset by a slight increase in the bank’s mergers and acquisitions business.