Banks under pressure

Earning results from financials suggest something's wrong on Wall Street.

By Anthony Mirhaydari Apr 19, 2012 3:55PM

As earnings season continues and financials unveil their numbers, a common theme is emerging: A tightening economy is pinching results.


That's because some of the most notorious earnings management techniques -- like release loan loss reserves or booking profits from a drop in a bank's own bond prices -- aren't working anymore. Moreover, there are signs that core investment banking operations are slowing while commercial banks are beginning to see an increase in delinquent loans again -- a dynamic that's strengthening in Europe, especially in Spain, as home prices fall.


Now stocks in the sector are threatening to drop down and out of a two-month-long pennant-reversal pattern.



This morning, Bank of America (BAC) reported a loss of 3 cents per share (vs. expectations of $0.11) as the company had to book, as a loss, an increase in the value of its debt. Excluding that, revenue was still down 3% as nonperforming loans increased from Q4. 


Morgan Stanley (MS) reported a loss of 5 cents on estimates of $0.43, thanks to an 8.4% drop in revenue. Investment banking and trading revenue both declined from year-ago levels. The company also had to take a loss on an increase in the value of its debt.


Earlier in the week, we had results from Goldman Sachs (GS), featuring a big drop in the company's risk exposure, a sign of caution and pessimism in the economy and markets. Morgan Stanley's risk exposure also dropped significantly.


Interest margins are falling across the industry as mortgages are refinanced at lower rates, Treasury yields drop again, and the competition for deposits heat up as the household savings rate falls.


The other big standout is how dramatically bank CEOs are pulling down loan-loss reserves to the bare minimum, especially smaller regional banks. This is typical late-business-cycle behavior. It makes banks vulnerable to any weakening in the economy and resulting increase in bad loans, since not only will revenue suffer but earnings will be hit by a need to rebuild loan loss provisions.


Here are three examples:

  • New York Community Bancorp (NYB): Loan loss provisions down to $15 million from $26 million in Q4, a drop of 42%.
  • Huntington Bancshares (HBAN): Provisions down to $34.4 million from $45.3 million, a drop of 24% that takes it down to "the low end of our long-term expectation" according to management.
  • Umpqua Holdings (UMPQ): Provisions down to $3.2 million vs. $15 million a year ago. Given that bank stocks were one of the primary motivators of the recent market uptrend, the new emerging downtrend in the sector is weighing on everything else.



For nimble traders, there are plenty of profit opportunities on the short side. Leveraged inverse ETF candidates include the ProShares UltraShort Financials (SKF), which I've recommended to my newsletter subscribers, and the Direxion 3x Daily Financial Bear (FAZ).


Individual short ideas include Bank of America and First Horizon National Corp. (FHN). I'm adding short positions in both, as well as a position in FAZ, to my Edge Letter Sample Portfolio.


I found FAZ, BAC, and FHN with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)


Disclosure: Anthony has recommended SKF to his newsletter subscribers. 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Apr 19, 2012 6:01PM
banks are down, because everybody knows wall street , are a bunch of crooks
Apr 19, 2012 8:15PM

The problem with banks is that when they were going full blast with lending in an artificial housing market in 2004-2007, they were actually showing artificial earnings from make believe borrowers and an overheated and over built housing market.


There is nothing to do to simulate this false pretense of business now.  They are screwed just like the rest of the over spent and over borrowed citizens and government.


The only way to correct the problems at hand are for the consumer and government to severely cut SPENDING FOR A NUMBER OF YEARS.  Our economy is built on spending and not saving and the stock market will not tolerate lower or anemic earnings from any businesses.


Better button down the hatches and get ready for a wild and crazy ride.  The people who are being screwed are the ones like myself who have stayed out of debt and saved money. 


WE are the ones being penalized with decreasing home equity and sorry yields on investments such as CDS.  Others just walked away from debt and/or filed bankruptcy.  It is not fair but the YOYOS in DC do not care about anything but themselves!!!



Apr 19, 2012 8:50PM
They are making things look as bad as possible as soon as they heard Bernake may not cough up QE3. The hogs want more food dumped into the trough. STOP GIVING THE  HOGS MONEY. LET THEM GO BELLY UP IF THEY HAVE TO.

Charts, graphs, and analysis aside, don't overlook the fact that Americans just don't believe or trust in these slugs anymore than they have to in order to keep their investments afloat. And even that isn't good enough anymore.


As far as commercial lending goes, people are realizing the value of small community banks and credit unions, where they all share a common bond.


Unfortunately, the big boys on Wallstreet keep dishing out crap thinking that people will just keep eating it.  Can anyone say barfbag!



Apr 19, 2012 8:59PM
There is nothing to do to simulate this false pretense of business now.  They are screwed just like the rest of the over spent and over borrowed citizens and government. 
Stagflation. Learn it - love it - LIVE IT.
Apr 20, 2012 6:02AM
  Even with the fed flooding the banks with almost free money the banks wont recover until they get rid of the 100's of thousands of foreclosed homes. The banks still hide the number of bad loans by delaying declaring them in default ,if they didn't they be insolvent.
Apr 20, 2012 6:06AM
It seems that the overall consensus is that wall street is a playground full of crooks.  However, I don't understand what would be much different if Obama wasn't in office.  Do you really think the situation would be that much different if a left or right president was in office? They would all play the bailout game sooner or later and not because I want them to but just because that is how it usually seems to go.
Apr 20, 2012 1:27AM
It's the banks stupid! They are the whole reason for the recent bubble in the stock market. Bernie gives them a virtually unlimited 0% line of credit to go out and speculate with and buy up the financial stocks to inflate the market. Just try to get a bank to loan at 4.25% without putting 30% down if you can get a fair apraisal. They are so dependent on the feds. free money and the feds. willingness to let them dump their toxic assets off their balance sheets and on to treasury ( the backs of every tax paying american) so they can lie to us and say they are profitable. Sounds kinda like what Enron did by hiding losses of their balance sheets, but it's not illegal for the banks. Seems to me there should be a lot of bankers in jail, however if our president gets reelected those same crooks will be part of the next administration. Now they are raping the loan loss reserves in a last ditch effort to bouy the financial indexes because they know the party is over if they fail to keep this no growth rally going.
Apr 20, 2012 7:37AM

Here we go again, they were greedy in 2008 and again now.

We bailed the banks out in 2008 and look now.


Does anyone see a pattern?  It's like our governmental officials, greedy and do not know how to run their own house.


I balance my personal budget and finances, so should they!!!

Apr 19, 2012 10:22PM
The Fed is giving the banks near free money for the past 3 years thanks to Ben and Obama and the tax payers are paying so how could they not make money??
Apr 20, 2012 12:43AM
Bank of America just got slapped with a huge Class Action Suit for withholding adverse earning projections on the Merrill Lynch Merger from BofA shareholders.  They just can't seem to play it straight with anybody!
Apr 19, 2012 10:44PM
I agree (pad iowa ).

It makes me angry every time I think about it. The government is taking our hard earned tax payer money and loaning it to these banks at zero interest. They are then taking our money and loaning it back to us at 15, 20, 25 and 30 percent interest. They are not creating anything just draining the people dry at both ends to sustain their bogus profits.  How is it that banks that were basically insolvent are deserving of government credit at zero interest rates  and insolvent countries like Greece and Spain are getting loans at 6 % but people are getting shafted with loan shark rates. How long can people keep paying those kinds of rates before they are just totally tapped out. 
Apr 20, 2012 12:06AM
The banks suck. Have you opened a new account or tried to qualify for a loan lately. The banks act like quasi government agencies with all the regulations, rules and fine print. The banks and the FED screwed up and now they want to fix it on the backs of those who didn't participate. I'll never buy another bank stock after owning several including Bank of America and getting shafted by Ken Lewi and the FED.
Apr 19, 2012 11:14PM
It makes me angry every time I think about it.It makes me angry every time I think about it.They are then taking our money and loaning it back to us at 15, 20, 25 and 30 percent interest. 
The problem that I see is inherent in the paragraph's progression. Let's break it down.
It makes me angry every time I think about it.
Me too!
The government is taking our hard earned tax payer money and loaning it to these banks at zero interest. 
Worse than that!
They are then taking our money and loaning it back to us at 15, 20, 25 and 30 percent interest. 
This is where we part. Why charge usurious interest rates when you can simply devalue? 

The effect is the same.

"Something's wrong on Wall street?" YA THINK!!!???


The simple fact that none of these @ss clowns are in jail is the first clue. 


Clue # 2. The system that promulgated the highly questionable investment practices and schemes which brought our economy to its knees hasn't changed much.


The only fix is to break the Wallington cycle of incestuous relations. If the Feds feel they have no choice but to hire from Wally street, they should do so only under closely monitored conditions and with intense scrutiny. It's not like taking a former mob hit man and turning him into an informant. The witness protection program is designed as protection against retaliation for telling all. But, if you slither from Wall Street to D.C. you are not likely to rat on your former buddies, and will be warmly welcomed back into the brotherhood upon "retirement".


And don’t even get me started on the Campaign Finance laws!


Ask Morgan Stanley, Goldman Sucks, or Bank Robbers of America, if they ever gave a thought to the safety, health, or well-being and prosperity of their customers and society. You may get a polite chuckle. And then put them in positions of public power like the Treasury or Fed and you can see how this doesn't always work out for the best.


Wouldn’t it be nice if we could create an independent corps of professionals that are educated and trained to understand the system, but aren't held slave to its sometimes dark and insidious nature that holds profits above all?


Private commerce and our mixed econonomic capitalistic model is undoubtedly what made this country great, but it only holds sustainable value when it’s not so good side is held in check.  Well, it’s time we got some new checkers…preferably before we get checkmated by the world’s other emerging economies.  


Keep Fighting America!

Apr 19, 2012 8:03PM
Everybody is waiting for Wall Street to have a real gain!! It's been decades for long term investors.
Apr 19, 2012 7:51PM
Smile Well if you bet the bailouts money it definitely has very far to go but it could only go so far no matter how far it could go. A lot of it go to the insider shares which they afforded to award themselves for co foundering the stck heavy companies and or corporations.
Apr 20, 2012 2:14AM
It's the banks stupid!   
The banks are the conduit for the blame and the Conduit.
Apr 19, 2012 9:46PM

After the annointed one loses the election in November things will improve IF Romney and the conservatives actually C-U-T spending. $16T in debt is killing the dollar and a lot of us too.

Apr 20, 2012 10:51AM
The big standout for me, was how much the CEOs are making.
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