Banks' crisis skills to be laid bare by results
NEW YORK (Reuters) - Big banks try to gird for crises as a matter of course and investors will soon learn how prepared they were for this summer's credit crunch.
Analysts and investors are speculating how badly Citigroup Inc (C.N), Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and smaller rivals may have gotten caught by a flight from risk that caused the value of billions of dollars of mortgages and loans to evaporate.
Hurt by write-downs and loan losses, many banks are expected to post lower earnings than in the second quarter. The question is how long their hangover from the end of the housing and merger booms will last.
"Generally, the view is banks will use the third quarter to build reserves or take losses stemming from liquidity issues," said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. "The market will overlook what is reported in the third quarter as it looks toward improving conditions in 2008."
Investors will also weigh whether depressed share prices already reflect expected bad news, or may fall further. They want banks to be up front about problems, and show their ills will not endure.
"Transparency will be huge," said Richard Moroney, chief investment officer at Horizon Investment Services LLC in Hammond, Indiana. "Investors want clarity that banks have a handle on the credit crunch. Banks that are straightforward will be received more favorably."
WRITE-DOWNS
Recent results at Bear Stearns Cos BSC.N, Goldman Sachs Group Inc (GS.N), Lehman Brothers Holdings Inc LEH.N and Morgan Stanley (MS.N) were driven heavily by write-downs for riskier mortgages and leveraged loans that investors avoided.
Similar exposures will be evident in July-September results at commercial banks. They could even be worse because Wall Street banks' results included June, before much of the credit malaise took hold.
Many banks' shares have already been beaten down.
Through September 26, the Philadelphia KBW Bank Index .BKX of 24 large banks was down 10 percent this year, while the KBW Regional Bank Index .KRX had lost 11 percent. The KBW Mortgage Finance Index .MFX was down 22 percent, including a 57 percent decline at Countrywide Financial Corp CFC.N.
The Standard & Poor's 500 .SPX is up 7.6 percent. That index traded at 15.2 times expected 2008 earnings, well above the 10.8 multiple for the 10 largest banks, according to Reuters Estimates.
Citigroup, Bank of America and JPMorgan, sometimes called "universal" or "money-center" banks, may offset some of the market turmoil from their many businesses that are less affected, such as retail banking and credit cards.
Still, the three largest providers of leveraged loans may suffer losses from rocky capital markets. Bank of America has said it expects a "meaningful impact" on corporate and investment banking results.
REGIONAL WEAKNESS Continued...
