Market slump apt to hurt bank profits
NEW YORK — The bank industry’s winning streak may be over.
A terrible spring in the financial markets is expected to leave big banks with second-quarter earnings that fall short of their stellar results from the first three months of the year. That’s bad news for companies that relied on trading profits to mask a still-miserable banking climate with high losses from failed loans and low demand for credit.
Banks begin their second-quarter reports tomorrow, when JPMorgan Chase & Co. issues its results. And there may be problems in the coming quarters, as well. A number of unknowns are weighing on full-year earning projections and on the stocks of big names like JPMorgan, Goldman Sachs, and Morgan Stanley. Among the biggest wild cards: how banks will be affected by the regulatory overhaul that’s awaiting congressional approval.
Fears about a “double dip’’ recession and Europe’s debt crisis have also added to the gloomy outlook.
The news isn’t all bad, though. Smaller banks that don’t bet heavily in the financial markets, including Boston-based State Street Corp. and Fifth Third Bancorp, are expected to post good to strong results for the April-June period.
Citigroup Inc. and Bank of America Corp. report earnings Friday, followed by Goldman Sachs Group, Morgan Stanley, and Wells Fargo & Co. next week. All six are expected to post profits. Yet nobody predicts a repeat of the first quarter, when Goldman, Bank of America, Citigroup, and JPMorgan were models of perfection: All four went without a single day of trading losses.
During the second quarter, worries over debt problems in Europe unnerved investors and sent stocks and commodities sliding. The Standard & Poor’s 500 index fell nearly 12 percent during three months of chaotic market swings.
Banks most active in capital markets could take the biggest hits. At Goldman and Morgan Stanley, revenue from fixed-income, currency, and commodities trading could plunge 30 percent or more from the first quarter, Credit Suisse analyst Howard Chen said.
Citing a “heinous trading environment,’’ banking analyst Meredith Whitney last week dramatically slashed her earnings estimate for Goldman from $4.75 a share to $1.70. Whitney also lowered her full-year forecast for Goldman’s earnings from $20 per share to $15.70.
Investors have reacted to the shaky outlook by selling. The S&P Bank Index, a broad measure of US bank stocks, fell 23 percent in the second quarter.