No Kitchen Sink, Just Leaky Faucet For Bank Stocks
Investors hoping that multibillion-dollar fourth-quarter writedowns would mark the end of the financial sector's woes need to keep hope alive.
The companies' balance sheets might look healthier in the wake of these writedowns, but the housing crisis is taking a bigger toll on other parts of banks' consumer businesses and that could mean more pain ahead.
"For all consumer credit, and I think we've pointed this out consistently, we see in home, auto, home equity, subprime, credit card, where home prices are down, delinquencies and charge offs are going up," JPMorgan Chase's CEO Jamie Dimon said on a conference call with analysts Wednesday.
Dimon said he expects home prices to continue to fall this year, somewhere in the range of 5 to 10 percent. And he doesn't see prices just falling in certain pockets of the country, but all around the U.S. He said his bank is prepared to deal with this, having increased its loan loss reserves by $2.3 billion to $10 billion dollars in the fourth quarter.
Echoing Dimon's statements that the housing market will continue to impact the consumer is San Francisco-based Wells Fargo.
"We expect the environment to remain challenging in 2008, particularly in consumer sector," Wells Fargo's CEO John Stumpf said in a press release detailing the bank's fourth quarter results.
Both banks' fourth-quarter profits were impacted by the mortgage meltdown, and the ripple effect it is having on the consumer. JPMorgan's fourth quarter net income from continuing operations fell 21 percent, hurt by a $1.3 billion subprime-related writedown; Wells Fargo's net income fell 38 percent as its boosted its loan loss reserves.
On Thursday, the nation's largest thrift reports its fourth quarter results and they aren't expected to be pretty. Washington Mutual has already cut its dividend to shore up capital as it braces for more mortgage related losses this year. The mean estimates for WaMu's fourth quarter loss, according to analysts surveyed by Thomson Financial, is ($1.36) a share, compared to the profit of $1.10 a share it reported in last year's fourth quarter.
Meanwhile, some investors expect a "kitchen sink" quarter from Merrill Lynch when it reports its fourth quarter results tomorrow. Under new CEO John Thain, the brokerage giant is expected to take a fourth quarter writedown of up to $15 billion dollars or more for mortgage-related assets.
Investors want to know if this will mark the end of the blood letting at Merrill, which took an $8.3 billion writedown in the third quarter. But as the banks' results suggest, this mortgage mess isn't a quick clean up.