January 20, 2010 / 7:52 PM / 10 years ago

Bank earnings spark divergent bond, stock views

NEW YORK, Jan 20 (Reuters) - Quarterly results from major U.S. banks including Bank of America Corp, (BAC.N) Citigroup, (C.N) and JPMorgan Chase & Co (JPM.N) have made stock investors hopeful and bond investors gloomy.

Although results have been helped by lower credit costs, the banks’ problems remain deep, and many bond investors are skeptical of any kind of rapid recovery.

“Stock investors are looking at their banks’ profitability and looking for that earnings growth, whereas the bond market is looking more at loan losses,” said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.

While JPMorgan Chase reported its fourth-quarter profit soared to $3.3 billion on strong investment banking results, it suffered deep losses on mortgage and credit card loans, dampening hopes that consumer credit is on the mend.

The risk premiums on corporate bonds, as measured by the extra yield they pay over safe Treasury notes, widened by 0.02 percentage point to 2.37 percentage points on Tuesday indicating investor skepticism over the results.

Those risk premiums, or spreads, had been as narrow as 2.32 percentage points on Jan. 13, according to Bank of America Merrill Lynch data.

Bank stocks rose by about half a percentage point over the same time period, according to the KBW Bank index .BKX.

“Stock investors are focused on the next quarter or two,” said Larkin.

Yet that view may prove too short-sighted, because bank lending could remain depressed for much longer if U.S. unemployment stays at 10 percent, an almost 26-year high. And with consumers and businesses loath to seek loans, it is not clear what will trigger profit growth for banks.

“Financial markets have been too euphoric about things. Bank earnings are providing a little dash of realism that the recovery process is going to take longer,” said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut.

Corporate bond investors are looking closely within the bank earnings at loan losses, delinquencies, and non-performing loans, MacDonald said. Some of these measures are stabilizing, but some are just growing at a slower rate, and most are at high levels now.

“All those things reflect high unemployment, a mortgage sector which is still struggling and a housing industry which still has a lot of issues to deal with,” MacDonald added. (Editing by Leslie Adler)

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