Have banks bottomed out?

Despite stock price jump for many this week, analysts see problems continuing

By Becky Yerak | Chicago Tribune reporter | July 19, 2008

Don’t break out the bubbly just yet.That’s the thinking of several bank watchers who, despite seeing financial services stocks end the week on a high note, say the worst probably isn’t over as the credit crisis approaches its one-year anniversary.

As the week started, many braced for the worst. IndyMac Bancorp Inc. had just been seized by U.S. banking regulators. And the federal government felt compelled to offer assurances that it would help out mortgage financiers Freddie Mac and Fannie Mae. The news drove down the KBW Bank Index by 8.5 percent on Monday.

But as the week wore on, megabanks Wells Fargo, JPMorgan Chase and, on Friday, Citigroup delivered better-than-expected results. Citigroup posted a $2.5 billion second-quarter loss, or 54 cents per share; analysts were expecting a 66-cent-per-share loss.

Meanwhile, of the four Chicago-area banks that have released second-quarter earnings, two got a bump in their stock price after numbers were released.

Could the worst be over?

Hardly, said BMO Financial Markets analyst Peter Winter.

“Analysts are falling over themselves to lower earnings estimates,” Winter said. Wells, Chase and Citigroup “beat very low expectations, and the quality of the earnings is not good.”

Also, the economy shows signs of weakening, he said.

“The feeling is that credit problems are contained now in residential mortgage areas, but there are signs that the problem is spreading to auto loans, credit cards and commercial lending,” Winter said.

By the end of the first quarter, many investors and analysts assumed banks had written off their bad loans and that profits would improve, said William Blair & Co. analyst David Long.

“That thesis proved wrong,” Long said. “While second-quarter earnings have been better than expected in some cases, the bar was set pretty low.”

And earnings could get worse.

“The peak for adjustable-rate-mortgage resets is the third quarter,” he said. “So many consumers current on their mortgages today will experience an increase in their monthly mortgage payments of several hundred dollars, which may lead to additional mortgage delinquencies in the second half of the year and into 2009.”

Another bank watcher also believes the uncertainty will continue into next year.

“The credit crunch will continue to be the significant wild card into 2009 and perhaps the most significant capital markets shock of the last two generations,” said Stephen Wood, Russell Investments senior portfolio strategist.