Trading Gains Wipe Away Bank’s Loan Losses
As traders prepare for another bout of earnings, analysts are most focused on the banking sector. Strong stock returns since March 9 may help banks clear earnings season with a positive number, even as loan losses continue to grow.
An Expensive Business
Amid tougher capital requirements, a prepayment requirement from the FDIC and growing loan losses, banking has become a high cost business. The nearly bankrupt FDIC will be asking several large banks to make a prepayment of as much as 3 years of premiums to help fill its exhausted coffers. All the while, the number of sour loans continues to increase due in part to a foreclosure crisis that is threatening home prices across the country.
Cyclical Markets
By-in-large the recent rise in stock prices is the result of better bank earnings. Ironically, it is the trading desks, not the lending arms, that will be generating all the profits, especially after the spectacular rally that began as the first quarter ended. Analysts expect that it will be the investment banking industry that posts the highest earnings, not traditional savings and loans, which are still fighting defaults. Knowing this, we also know that the rally off the low was largely artificial, helped by rising stock prices from rising stock prices.
The Numbers
Despite operating incomes that are expected to be as much as 60% higher than the year ago period, loan losses are projected to be as high as 90% higher than the same period. The disconnect between the returns generated on the market and through interest payments is likely to come back to bite, and do so twice as hard. In the short term, there is going to be plenty of money to make on banks certain to outperform (those that were long stocks) but in the end the loan losses are going to drag balance sheets for many quarters to come.
