Bank Earnings Jump 57% in Analyst Forecasts

January 04, 2012, 11:25 PM EST By Michael J. Moore and Dawn Kopecki

Jan. 4 (Bloomberg) -- Analysts’ failure to foresee declining earnings per share for the biggest U.S. banks last year hasn’t stopped them from predicting an even bigger profit surge for 2012.

The six largest lenders, including JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc., may post an average profit increase of 57 percent this year, according to 184 analysts’ estimates compiled by Bloomberg. A year ago, analysts predicted profit at the banks would climb 32 percent in 2011. Instead, earnings per share probably fell 18 percent as the economic recovery analysts counted on never took hold.

Improved trading results, more investment-banking deals, expense-cutting measures and lower credit costs will lead to the increase in earnings that didn’t materialize last year, analysts say. That may provide a boost to stock prices after financials were the worst-performing industry in the U.S. in 2011.

“The banks could get some positive operating leverage in 2012 from trading normalizing and expenses normalizing,” said Chris Kotowski, an Oppenheimer & Co. analyst in New York who estimates at least an 18 percent earnings-per-share increase for each of the six banks. “It’s not like all the news on the banks was uniformly bad all the time. The market had a bigger freakout than the companies did.”

‘More Optimistic View’

Banks’ trading results were decimated as Europe’s sovereign-debt crisis deepened, protests helped topple governments in the Middle East and Africa, and an earthquake and tsunami in Japan triggered a nuclear meltdown. The U.S. economy, measured by gross domestic product, probably expanded 1.8 percent last year, according to economists’ estimates compiled by Bloomberg, instead of the 3.1 percent predicted a year ago.

“Everyone had a much more optimistic view of the economy,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and an analyst with FBR Capital Markets Corp. in Arlington, Virginia. “The banks need GDP growth to grow loans. We all thought there would be loan growth, and Europe didn’t help anybody.”

Bank stocks fell along with earnings last year and were the worst performers among 10 industries tracked within the Standard & Poor’s 500 Index. Financials dropped 18.4 percent, led by a 58 percent plunge for Bank of America. Goldman Sachs dropped 46 percent, while New York-based Citigroup Inc. and Morgan Stanley both declined 44 percent. JPMorgan, the largest U.S. bank by assets, was down 22 percent and Wells Fargo & Co. 11 percent. The broader S&P 500 Index was unchanged for the year.

Global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg. Fixed-income trading likely dropped 27 percent and equities revenue 3 percent at the 10 biggest investment banks, according to industry consultant Coalition Ltd.

Goldman, Morgan Stanley

The increase in 2012 earnings will be led by Morgan Stanley and Goldman Sachs, which are most reliant on trading and investment-banking revenue, analysts estimate. They predict the New York-based firms will more than double earnings per share in 2012, after missing 2011 targets by the most of the six banks.

Revenue from trading and investment banking may rise about 8.5 percent for the industry, according to Kian Abouhossein, a London-based analyst at JPMorgan. That may help reverse a two- year slide in overall revenue as those areas account for about a quarter of total revenue at the five biggest Wall Street banks.

Reducing Expenses

Any revenue growth may boost the profitability of banks as they also seek to reduce expenses. Bank of America said last year it would chop $5 billion in annual costs, and Morgan Stanley and Goldman Sachs have targeted at least $1 billion. All three firms say they will eliminate positions, part of a wave of more than 230,000 job cuts announced by financial companies worldwide last year.

“The earnings ramp-up is a return to some kind of normalcy in trading activities and deal flow, as well as tighter control on expenses,” said Fred Cannon, an analyst at KBW Inc. in New York. “It would be kind of depressing to forecast financial- market activity in 2012 as being like it was in 2011.”

Banks may also benefit for a third consecutive year from improving credit quality, according to Andrew Marquardt, an analyst at Evercore Partners Inc. in New York. Net write-offs and loan-loss reserves will approach “normalized” levels in 2012, Marquardt estimated in a Jan. 2 note. A decrease in reserves accounts for all of the expected 25 percent increase in earnings per share at Bank of America, he wrote.

Loan Growth

While analysts see a bigger percentage jump in earnings for 2012, they aren’t as optimistic as they were a year ago. The combined $27.84 per share the big banks are expected to earn this year is less than the $34.21 analysts predicted they would produce in 2011 and up from 2010 as the European debt crisis may hurt results.

“I expect more of the same,” Miller said. “Bank valuations could improve, but it’s going to be very slow loan growth, if any at all. Earnings will remain under pressure.”

Jason Goldberg, an analyst at Barclays Plc in New York, wrote in a note yesterday that loan growth probably will accelerate in 2012. Loans at the four largest U.S. banks, net of loan-loss allowances, increased 0.3 percent in the nine months ended Sept. 30, company filings show. That compared with consensus estimates of 2 percent growth at the big banks, Brian Foran, an analyst at Nomura Holdings Inc., wrote in March.

“The risk of not owning U.S. bank stocks is greater than owning them,” wrote Goldberg, who projects an aggregate 21 percent increase in earnings per share for JPMorgan, Bank of America, Citigroup and San Francisco-based Wells Fargo. “Headwinds from 2011 should subside in 2012.”

Bank of America

Bank of America, which was the biggest decliner of 2011 in the Dow Jones Industrial Average and KBW Bank Index, has been hurt by rising costs tied to faulty mortgages. The Charlotte, North Carolina-based lender, led by Chief Executive Officer Brian T. Moynihan, 52, has said it plans to eliminate 30,000 jobs in the next few years.

Bank of America’s 2011 earnings estimates were chopped 54 percent as the lender, the second-biggest in the U.S. by assets, spent more than $10 billion to settle soured-mortgage claims with bond insurers and private-label investors. Morgan Stanley may fall short of 2011 estimates by 72 percent and Goldman Sachs may miss by 69 percent. Estimates for Wells Fargo rose 1 cent, the only increase.

“What has been the biggest pressure is this drop-off in capital-markets activity, and also the inability of BofA to get its mortgage issues behind it,” KBW’s Cannon said.

Even with a projected earnings increase and low valuations, investors should be “cautious” on financials because of uncertainty about Europe, Joseph Tanious, a market strategist at JPMorgan Asset Management in New York, said Dec. 29 on Bloomberg Television’s “In the Loop.”

“If you look at where valuations are right now in financials, it’s hard to ignore them,” Tanious said. “They are very, very attractive. But if we talk specifically about 2012, which we think will be another volatile year, financials, as they performed this year, may in fact lag the broad market.”

--Editor: Robert Friedman, Peter Eichenbaum

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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Analyst ‘Sell’ Stock Calls Rarely Pay Off

May 20, 2011, 9:17 AM EDT By Inyoung Hwang

May 20 (Bloomberg) -- Motorola Mobility Holdings Inc. had rallied 40 percent from its spinoff when Adnaan Ahmad started covering the stock with a “sell” rating. The mobile-phone maker has lost nearly all its gain since his Jan. 21 report.

“The market was pricing in strong profits for its handset business, which I found outrageous for a company that’s not a low-cost leader or a niche vendor,” said Ahmad, a London-based analyst at Berenberg Bank who has also covered phone stocks for Morgan Stanley and Merrill Lynch & Co.

Ahmad is one of the few analysts who issued “sell” recommendations and fewer still whose advice turned out to be right during the biggest U.S. market rally since 1955. Just 5.1 percent of analyst ratings are “sells,” according to data compiled by Bloomberg. Among 1,890 analysts tracked by Bloomberg for this story, fewer than 1 percent advised investors to unload a Standard & Poor’s 500 stock that later showed a decline, or rose only after they upgraded it, the data show.

“Any calls that an analyst makes that’s right deserves some praise and sells are so few and far between,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion. “An analyst who’s a good analyst and does great, honest work, if he puts out a ‘sell’ signal, it should be looked at.”

Oil Drilling

Diamond Offshore Drilling Inc. had rallied 73 percent by October 2009 from its March low when Scott Gruber of Sanford C. Bernstein & Co. initiated coverage with “underperform.” The Houston-based deepwater oil driller fell 33 percent, from $94.17 to $62.83, compared with an 11 percent decline by the S&P 500 Oil & Gas Drilling Index, through July 26, when New York-based Gruber lifted his rating to “market perform.” Diamond Offshore has since climbed back to $72.06.

Charles Cerankosky, the Cleveland-based analyst of Northcoast Research Holdings LLC, has maintained his “sell” call since June 2009 for Supervalu Inc., when the Eden Prairie, Minnesota-based owner of Save-A-Lot and Albertsons grocery stores was trading at about $13. The stock has declined 20 percent in the past year, and is now at $11, as sales slumped 7.5 percent in fiscal 2011 from the prior period.

Motorola, after pioneering mobile-phone technology in the 1980s and 1990s, saw its market share fall to 2.4 percent last year from 21.9 percent in the second quarter of 2006, according to researcher Gartner Inc. Motorola Mobility, made up of the mobile-phone and set-top box businesses, was spun off from what is now Motorola Solutions Inc. after billionaire investor Carl Icahn pressed for a split to improve performance.

Competition Concern

More than 50 percent of analysts recommend the stock today, while 38 percent rate it as a “hold.” Three analysts have a bearish recommendation. Ahmad said that while some analysts may think Motorola Mobility will get help from an improving industry and Chief Executive Officer Sanjay Jha’s leadership, he’s concerned about the company’s competition.

“I thought the company was going to be stuck between a rock and a hard place, and hence margins were going to come under pressure,” Ahmad said. “That’s been happening much more quickly than I anticipated.”

The Libertyville, Illinois-based company’s stock has lost 31 percent since Ahmad’s “sell” rating, falling from $34.88 on Jan. 21 to $23.96 yesterday.

The bearish recommendations identified by Bloomberg preceded a decline in the stock price between January 2009 to April 6, 2011. The S&P 500 companies tracked were those with at least 15 ratings and the analysts had to have given at least one recommendation in 2011.

Analysts give fewer “sell” ratings because stocks tend to rise over time, according to Eric Teal of First Citizens Bancshares Inc. and Timothy Ghriskey of the Solaris Group LLC. That makes calls like Ahmad’s notable for their rarity and accuracy, they said.

Market Doubles

The S&P 500 doubled from its March 2009 low to 1,363.61 on April 29, its highest level since June 5, 2008, as government stimulus measures and corporate earnings that have topped analyst estimates. Only 10 stocks in the S&P 500 are lower now than when the bull market began in March 2009, according to Bloomberg data. The S&P 500 rose 0.2 percent to 1,343.6 at 4 p.m. yesterday.

“Analysts are swimming upstream,” said Teal, chief investment officer at First Citizens in Raleigh, North Carolina, which manages about $5.2 billion. “History indicates that markets rise over time, so it’s challenging for analysts to identify those companies that won’t benefit from at least a rising tide.”

The S&P 500 rose 5.7 percent annually from 1930 through 2010, data compiled by Bloomberg show. The benchmark gauge did fall 57 percent from its October 2007 record through March 2009, amid the worst recession since the Great Depression.

‘A Lot Easier’

“It was a lot easier to put ‘sells’ on in the fall of 2008 than it is today,” said Ghriskey, chief investment officer at Solaris in Bedford Hills, New York, which manages $2 billion.

Christopher Blansett, a San Francisco-based alternative energy analyst at JPMorgan Chase & Co., covers 12 companies, according to Bloomberg data. Five are rated “underweight,” four are recommended “overweight” and three are “neutral.”

Blansett, who has worked at JPMorgan for almost seven years, rated MEMC Electronic Materials Inc. in June 2009 with an “underweight.” The stock traded as high as $20.94 at the time. The maker of silicon wafers for semiconductors and solar panels has lost about half its value since then, at $10.40 yesterday.

“We’re probably the most bearish people on the solar outlook on the Street” among larger firms, Blansett said. “You tie that with the fact that MEMC has increasingly shifted their business toward solar and they’ve increasingly impaired their balance sheet in order to increase the company’s focus on that sector. We just don’t see any reason why the stock’s going to work anytime soon.”

Note Sale

MEMC has missed analyst estimates for the past four quarters. The St. Peters, Missouri-based company has 10 “buy” ratings, 11 “holds” and four “sells.” It sold $550 million of senior notes March 3, according to Bloomberg data.

“Tech investors really dislike companies owning debt,” Blansett said. “The fundamental concept is these stocks and these industries are cyclical. Tech investors look for companies with good balance sheets to have buffer when the cycle rolls over. You get very concerned when there’s a company with a lot of debt.”

Blansett said that analysts that have built strong relationships with investors may be more confident in making bearish calls, while newer analysts may find it harder until they build their investor base and contacts with company management.

“It’s tough to be negative on a stock. That might reduce your level of corporate access and overall interaction with the company,” he said. “Some people don’t have the stamina to deal with being underweight companies for a very long time because it can be very painful.”

Housing Crisis

Michael Widner, a Baltimore-based analyst with Stifel Nicolaus & Co., rated D.R. Horton Inc. with a “sell” twice, in April 2009 and August 2009. The Fort Worth, Texas-based homebuilder plunged more than 70 percent in about two months to a low of $4.34 in November 2008 during the housing crisis.

Horton slumped 9.1 percent after Widner’s first “sell” recommendation in April when it had climbed to about $10, and 12 percent after his second, when it again approached $12. He lifted his rating to a “hold” in June. The stock closed at $11.76 yesterday.

“I’m not in a business for a popularity contest,” he said. “Investors recognize there’s a value to honesty. My niche is to provide good research and tell people what I think. Even though people may not like to hear ‘It’s time to sell,’ they respect it when it turns out you were right.”

--With assistance from Laurie Meisler and Mary Lowengard in New York and Hugo Miller in Toronto. Editors: Jeff Sutherland, Joanna Ossinger

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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