Sunday, April 20, 2008

Financial News Really Stunk Last Week

From the Washington Post:

J.P. Morgan Chase, which previously escaped largely unscathed from severe problems in the mortgage market, reported Wednesday that its first-quarter profit fell by half, showing how credit troubles in subprime home loans are now spreading to other types of consumer and business debt.

Earnings at J.P. Morgan, the country's second-largest commercial bank, were hurt by $2.6 billion in write-downs as the firm restated the value of distressed assets on its books, including subprime and other mortgages, and leveraged loans for corporate takeovers. Profit was also pounded by the bank's decision to set aside $2.5 billion more to cover expected losses on a wide range of loans.

Still, the results came in above the expectations of most analysts. Combined with a not-so-dire earnings report from Wells Fargo and an optimistic growth outlook from chipmaker Intel, the J.P. Morgan earnings inspired investors to hope that the worst of the subprime crisis had passed.

I've never been a big fan of the "came in above or below" analysts expectations line of thought. Analysts have proven themselves to be incredibly unreliable (at best). However, that is important to traders.

From the AP

Wells Fargo & Co.'s first-quarter profit fell 11 percent as the nation's fifth-largest bank wrestled with rising loan losses and braced for more trouble ahead.

The San Francisco-based company said Wednesday that it earned $2 billion, or 60 cents per share, during the first three months of the year. That compared with $2.24 billion, or 66 cents per share, at 2007's outset.

It marked Wells Fargo's second straight quarter of earnings erosion, the first time that has happened since the bank merged with Minneapolis-based Norwest Corp. nearly a decade ago.

The rare slump stems from a deepening morass of home loans that aren't being repaid amid the worst real estate slump in decades. The bank also is having a more difficult time collecting on credit card debts and small business loans.


Wells Fargo also fared better than analysts anticipated. Analysts polled by Thomson Financial had expected earnings of 57 cents per share for the first quarter.

The bank's revenue climbed 12 percent to $10.56 billion, topping analysts' average estimates by about $150 million.


The bank wrote off $1.5 billion in loans as losses during the quarter, more than doubling the $715 million setback suffered a year ago. Wells Fargo also set aside $500 million to cover loan losses that it expects to suffer in the future.

Again, note the because earnings bear analysts expectations everything is A OK. This despite the fact the bank wrote off more than double the amount of losses in the year-ago quarter.

From Financial News-US

Wachovia, the US’ fourth-largest bank, on Monday reported a $393m (€248m) first-quarter loss, and also outlined a $7bn cash injection plan to make up for a poorly timed expansion of its mortgage business.

Wachovia's loss for the quarter works out to 20 cents a share, as compared to a profit of $2.3bn, or $1.20 a share, a year earlier. Excluding merger-related and restructuring charges, the bank lost $270m, or 14 cents a share. Revenue fell 4.5% to $7.9bn from $8.3bn last year. Analysts surveyed by Thomson Financial had expected Wachovia to earn 40 cents per share.

The bank also said it took writedowns of $2bn during the quarter related to the credit crunch. It also set aside $2.8bn to cover problem loans, up from $1.5bn in the fourth quarter. Wachovia plans to cut its dividend by 41% to 37.5 cents per share from 64 cents per share.

Declining earnings, $2 billion in writedowns and increasing loan-loss reserves. Let's buy this company now -- they have a bright future.

From the AP:

Washington Mutual, the nation's largest savings and loan, said Tuesday it lost more than $1.1 billion in the first quarter as the struggling economy and flagging real estate values pummeled the bank's borrowers.

The Seattle-based thrift lost $1.40 per share, compared with a profit of $784 million, or 86 cents per share, in the first quarter a year earlier.

It was the bank's second consecutive quarterly loss, but Chairman and CEO Kerry Killinger promised shareholders that Washington Mutual will turn around within a year.

Washington Mutual, which last week estimated a loss of about $1.1 billion for the quarter, said it needed to set aside $3.5 billion to cover bad loans in its $250 billion portfolio during the first quarter. The bank set aside less than half as much to cover bad loans in the year-ago period.

Increasing loan loss reserves, decreasing earnings -- why aren't there more buy recommendations on this company?

From the AP:

U.S. Bancorp said Tuesday its first-quarter earnings fell 4 percent due to losses stemming from the mortgage crunch but declared its credit problems will continue to be manageable.

The Minneapolis-based bank said it earned $1.09 billion, or 62 cents per share, down from $1.13 billion, or 63 cents per share, during the same period last year. Revenues were $3.87 billion, up 14 percent from $3.39 billion in the first quarter of 2007.

Analysts polled by Thomson Financial had expected earnings of 61 cents per share on revenue of $3.66 billion.


U.S. Bancorp raised its loan-loss provision to $485 million, a $260 million increase over the fourth quarter of 2007, to combat rising delinquencies and defaults in the residential real estate markets. Net charge-offs were $293 million in the first quarter, compared with $225 million in the fourth quarter and $177 million in the first quarter of 2007.

Again, note the rising loan loss provision, which is hitting even well-run banks.

From Reuters:

Capital One Financial Corp, (COF.N: Quote, Profile, Research) a credit card and banking company, said on Thursday that first quarter earnings fell, as it set aside three times as much money for credit losses as the same quarter last year.

The fourth-largest issuer of Visa and MasterCards in the United States said it sees evidence of the economy weakening and expects further deterioration

"This cyclical downturn may be deeper and longer than was anticipated in prior results," Capital One Chief Financial Officer Gary Perlin said on a conference call.

The McLean, Virginia company said quarterly net income fell to $548.5 million, or $1.47 a share, from $675.0 million, or $1.62 a share a year earlier.

Excluding items, Capital One earned $1.35 a share, compared with analysts' average forecasts of $1.44 a share, according to Reuters Estimates.

In a sign of weakening credit quality, the company charged off bad loans in its U.S. credit card segment at a 5.85 percent annualized rate during the quarter, up from a 3.72 percent rate in the same quarter last year. Those numbers reflect loans on and off the company's balance sheet.

Capital One set aside $1.08 billion for bad loans in the first quarter, compared with $350 million in the same quarter last year.

Capital One set aside nearly twice the amount of capital for loan loss reserves. Also notice the sharp increase in charge-offs.

From the WSJ:

Profits in all four of Citigroup's main business lines fell sharply from a year ago, and executives warned that the tough times are likely to drag into next year. Ratings firms put Citigroup's debt on watch for downgrades, but the company's shares rose 4.5%, or $1.08, to $25.11 in 4 p.m. New York Stock Exchange composite trading, as investors expressed relief the numbers weren't worse.

Citigroup's investment bank endured about $12 billion in write-downs on its exposure to various parts of the credit markets, bringing the division's total losses to about $32 billion since last summer. More hits are possible.

The global consumer group suffered from $6 billion in costs arising from troubled mortgages, home-equity lines, credit cards and auto loans. Losses may "extend beyond where we've seen historical levels go," said Chief Financial Officer Gary Crittenden. "We are in uncharted territory."

That is among the starkest warnings sounded this week by big banks that reported first-quarter results. It suggests the industry may continue to be bogged down by losses, as the crisis that originated with subprime mortgages afflicts other types of consumer loans.

And despite stockpiling more than $30 billion in capital in recent months, and repeated assurances from executives that Citigroup has a plethora of capital, Mr. Crittenden said in an interview he couldn't rule out the possibilities that Citigroup will raise more money or that the board will further cut the firm's dividend.

Short version, what we saw last week was declining earnings, increasing loan loss reserves, more need for capital injections and increasing charge-offs across the financial sector. We're no where near the end of this.