One of the main methods by which the U.S. banking industry boosting profits in recent quarters, began to be exhausted so that expectations are more modest results in the third quarter. JPMorgan Chase & Co is the first major financial institution to disclose data from July to September. Analysts expect second-largest U.S. bank announced on Wednesday anemic 1.3 percent growth in profit over the same period last year.
This may be the beginning of a severe series of reports. In the last two quarters of U.S. banks strengthened their net earnings, set aside less money for losses on loans – even less of the bad loans that are real then deducted.
The strategy had logic when credit losses at least at first glance have stabilized. In the current economic slowdown, however it is uncertain whether the reserves to cover losses or profits earmarked for this purpose can be reduced.
„This is not an inexhaustible well,“ said Matt Makormik, portfolio manager and banking analyst at Bahl & Gaynor.
Because of weak demand for loans and shrinking profit margins on lending banks do not have new sources of growth in net revenue compared to second quarter, analysts say.
Bank of America Corp and Citigroup is expected to report lower earnings for the period July to September compared to the previous, although annual growth can register for extremely weak levels in 2009
„Quarter was disappointing,“ said Michael Nix of Greenwood Capital Associates.
Nix, who owns shares in Bank of America as part of his company managed assets of $ 850 million, far refrained from investing in banks. „There will be a pretty serious cross winds,“ it provides.
Shares of banks are relatively inexpensive, with most traded below their book value, analysts said. Historically, stocks of big banks were going in at nearly twice the book value.
„These shares appear undervalued only to current information and it is insidious part, said Nix. The problem is how things look after a time when companies are already sold several units and the impact of regulatory changes have occurred. „He added that Citigroup disposes of assets which are not defined as part of their core business and it brings uncertainty about the potential its earnings after the process.
Investors are waiting for more clarity and effects of the law, „Dodd-Frank“ for financial reform, which will reduce the profits of banks from processing debit cards and will shrink their trade in securities for own account. Bank of America warned in July that the new legislative framework could lose about $ 2 billion in annual revenue from processing debit cards.
JPMorgan Chase may also suffer from the law, „Dodd-Frank“ in the long term, particularly the clauses that move derivatives trading on stock exchanges.
U.S. regulators are investigating the practices of banks and in seizures of mortgaged property to satisfy the growing public anger provoked by the deficiencies found in the documentation of some banks. Errors even prompted investors to seek new restrictions on mortgage lending.
U.S. banks have committed $ 40.3 billion in the second quarter for losses on loans, which is the lowest level of security from the first quarter of 2008, according to the FDIC for deposit insurance (FDIC).
The lower level of reserves is partly contributed to the highest level of net income posted by U.S. banks for two years, which soared to $ 18 billion last quarter, according to the FDIC.
Big banks used newly released reserves to help its battle with market expectations, but investors reacted skeptically.
Shares of Bank of America, the largest U.S. bank by total assets, and Citigroup have seen a decline after the announcement of earnings for the second quarter in July. Since then, shares of Bank of America lost another 4%, while those of Citigroup regained almost 7%.
Both banks have performed better than expected last quarter, but 40% of their profits reserves were released after each is released about $ 1.2 billion in taxes during the quarter.
Investors know that exempt reserves can not indefinitely be attaching the income seems to calculate these doubts in his assessment of bank shares.
„Too aggressive drainage reserve will not convince anyone. People thought this revenue for poor quality, „said Scott Sayfars, managing director of Sandler O’Neill and Partners. He added that investors expect more signs of growth in revenues.
Proceeds from investment banking, however, is expected to fall in the third quarter because of lower sales volumes and guarantee. And, at least it is not clear where the growth will come in loans for most banks. Consumers have begun to pay its obligations, but still eager to be loaded with new debts, as unemployment remains near 10 percent and growth of the economy is anemic.
Total outstanding consumer loans in the U.S., except for those real estate fell to $ 2.4 trillion. in August, which is their lowest level since 2006 according to the Federal Reserve.
We should note, however, that banks are not subscribed for bad news. SunTrust Banks Inc expects to turn a profit for the first time in seven quarters since. Atlanta-based bank is the largest crowd in the government program for the release of problematic assets (TARP).