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Stock Ideas Investors Daily Edge The banks are back. Profits are up.
Stock Ideas Investors Daily Edge The banks are back. Profits are up. 
Market Watch
| So far, 2008 has been the worst start for global markets in recent financial history. As I scanned the stock markets' page of The Economist last week, a single stock market in the world ended the week in the black: Taiwan, itself off more than 25% from its November peak. Last week was particularly brutal. | |
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| The banks are back. Profits are up. |
| Tuesday, 28 April 2009 | ||||||
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The banks are back. Profits are up. Writedowns are lower. The government has their back. And the worst is over. Forget Swiss-based USB. Their huge losses were the exception... Judging by their latest quarterly reports, big banks have finally figured out how to make money again. Goldman Sachs, JPMorgan, Bank of America, Wells Fargo and even Citigroup all reported profits for the first quarter. But a closer look under the hood reveals that many of the big banks reported fake earnings... * Bank of America arbitrarily increased the value of its Merrill Lynch assets. * Goldman Sachs bunched much of its losses into the month of December – a month it skipped reporting on this year. * JP Morgan’s bonds fell in price. And that perversely allowed the bank to increase its bottom line. This is how the New York Times explained it: “Theoretically, JP Morgan could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped.” Most of the banks did extremely well in the fixed income, currency and commodities trading this past quarter. Here’s a slide from Barclay’s quarterly presentation... UBS - Barclays Q1 slide So is this the new bank model? Making boatloads of money from forex and bonds? Not likely. It looks more like a one-time bonanza to me. The Fed and European central banks were broadcasting their quantitative easing efforts. It’s not hard to make money when the government is telling you which way rates are going. Now that the run-up to quantitative easing is over, making these oversized profits won’t be so easy. So where else will the banks be getting their money? That’s the problem, isn’t it? A bank’s loans are only good assets if they get paid back. And the brutal recession we’re having is forcing more and more loans into default. When they go into default, they’re not earning the banks any interest. The one thing that the banks and Barry Bonds have in common? Neither is coming back soon... * Commercial loans in default or foreclosure jumped 43 percent in the first quarter. This trend will continue for at least the rest of the year. * Banks may need to raise $1 trillion in capital to cushion losses according to an April KBW Inc. report. * Mortgages, credit cards, commercial real estate and virtually every other type of loan are deteriorating in the middle of this depression. * To make money, banks have to start issuing more loans. That would certainly make President Obama happy and give a much needed boost to the economy. But, the fact is, banks are issuing fewer loans, taking in less fees, and paying out higher expenses. And the stress tests banks are undergoing will force many of them to raise capital and further dilute their shares. These tests could be a lot more stressful. Even so, they’ve outed some of our biggest banks as capital-challenged. They’ll be asked to raise more. And more banks will be asked to improve the quality of their capital by increasing the amount of common equity they hold. If they can’t get it from the private sector, they’ll have to get if from the government. Out of the woods yet? Not by a long shot. Invest well, Andrew
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