Investors should avoid bulge-bracket banks ahead of what could be another tough earnings season, with macro concerns such as the U.S. “fiscal cliff” threatening to set off a decline in stocks, JMP Securities analyst David Trone said in a report Thursday.
JMP raised third-quarter earnings estimates for universal and investment banks to reflect higher debt capital market activity and mortgage banking revenues, but overall its third-quarter estimates are still between 5 percent and 35 percent below consensus.
“We believe results should still be quite weak as trading activity remains sluggish, NIM [net interest margins] tightens further and reserve releases should decline,” the analyst wrote.
Trone has been bearish on universal banks for some time given regulatory headwinds that limit returns to equity shareholders.
The concerns mounted as the European debt crisis escalated and the threat of the U.S. “fiscal cliff” loomed.
Bank stocks have rallied in recent weeks following the announcement of theFederal Resereve’s announcement of a third round of quantitativeeasing. But stocks are “not cheap enough for the risks ahead,” Trone wrote.
“We believe the probability of either a Greek meltdown or the U.S. ‘fiscal cliff’ triggering is about 90 percent, and we also believe either event would cause a dramatic decline in capital markets stocks,” the analyst said. “Thereafter, assuming no chain reactions, contagions, or major collateral damage, we expect a dramatic and sustainable rally. But for now, we wait.”
Here is a summary of JMP’s expectations for the major bank stocks.
5. Goldman Sachs
Core Earnings Per Share (EPS) Forecast: $1.49 vs. $2.08 consensus
“We believe it will be difficult for GS shares to do well in the midst of the European Union crisis — which we expect to get worse — and the pending ‘fiscal cliff’ issues forthcoming in the U.S. central bank actions, which has pushed GS shares higher, is highly unlikely to matter much,” the analyst said.
The Volcker rule impact is likely to be another overhang, and it will take several months to work through these events, Trone wrote.
4. Morgan Stanley
Core EPS Forecast: 17 cents vs. 27 cents consensus
Trone wrote: “Our target implied P/TBV of 0.4x seems very cheap, but GAAP results are losses, there is a low margin of profit error even on a core basis, and ROEs are likely to remain quite weak.”
3. JPMorgan ChaseCore EPS Forecast:
$1.02 vs. $1.17 consensus
“For years, we have been cautious on the universal banking model, thanks to consumer finance regulations, Basel III, and the continued mortgage mess. Now we add the current EU crisis (which we expect to get materially worse) and future consternation over U.S. ‘fiscal cliff’ impacts,” the analyst said. “Finally, JPM’s CIO story has Washington up in arms, which means Volcker will likely be implemented more harshly.”
He added that the stock appears “overbought.”
2. CitigroupCore EPS Forecast:
89 cents vs. 98 cents consensus
“The good news is that Citi has a nice international franchise, particularly in fast growing markets, while the bad news is it continues to hold a large legacy asset portfolio,” Trone said. “We expect bulge earnings and shares to be sluggish (or worse) for most of the balance of the year.”
1. Bank of AmericaCore EPS Forecast:
11 cents vs. 14 cents consensus
“Previously, we were cautious on BAC shares, reflecting substantial risk that mortgage put-backs end up far beyond the current reserve. And then there were all the other issues, such as burdensome consumer finance regulations, a big increase in capital adequacy standards which hurts returns, and other (non-putback) mortgage mess costs,” he wrote. “The EU crisis isn’t likely to cause direct balance sheet losses, but the stock could fall in sympathy with others, while the U.S. ‘fiscal cliff’ impacts loom.”
—By TheStreet.com’s Shanthi Bharatwaj
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