Will bank earnings be bad ... or less-than-bad?
NEW YORK (Reuters) - U.S. banks suffered a tough winter and may see credit losses grow as the economy flounders, yet investors may react positively later this month to lenders that appear to be on top of the problem.
As banks start reporting first-quarter results next week, analysts expect more losses from subprime and other mortgages, credit cards, and commercial real estate, especially in markets such as the Southwest, Florida, Michigan and Ohio.
But some observers say bank stocks already reflect expectations for plenty of bad news. Market sentiment has been growing that the sector may have already cratered.
"We're watching to see if news is 'less bad' than expected," said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which owns shares of Citigroup Inc (C.N) and Washington Mutual Inc WM.N.
Banks, savings-and-loans and mortgage lenders have suffered more than $200 billion of write-downs for credit and other losses, an amount some analysts expect to grow this year by hundreds of billions of dollars.
The industry is also exposed to well over $100 billion of loans used to fund corporate buyouts, which it can't unload.
Banks are "constipated from all these bigger deals that they have stuck on their shelves," Lawrence Schloss, who runs private equity firm Diamond Castle Holdings LLC, said at this week's Reuters Hedge Funds and Private Equity Summit.
"It's a bad liquidity environment," he added.
And yet, some outside investors are showing support. Since the credit crisis began, they have infused well over $100 billion into the industry, helping lenders shore up capital.
Washington Mutual, the largest thrift and a big mortgage lender, was the latest, raising $7 billion this week even as it forecast a second straight, $1 billion-plus quarterly loss.
CRISIS OF CONFIDENCE
In the first quarter, the Philadelphia KBW Bank Index .BKX of 24 large banks fell 10.9 percent, and the KBW Regional Bank Index .KRX fell 6.2 percent. These compared with a 9.9 percent drop in the Standard & Poor's 500 .SPX.
Longer-term, the damage has been more severe. In the 12 months ended March 31, the large bank and regional bank indexes fell a respective 30.7 percent and 25.9 percent, while the S&P 500 was off just 6.9 percent.
"There is a crisis of confidence for many investors in bank stocks," Armbruster said.
Problems have prompted some banks to seek buyers, including Cleveland-based National City Corp NCC.N, which has been hurt by exposure to mortgages and Florida. Continued...
