The Key to Earnings Season? Banks

David Paul Morris | Bloomberg | Getty Images

Earnings season is coming: Was the third quarter the earnings trough?

"Slowdown in earnings" was a major theme for bears last year. Earnings had strengthened beginning in 2009, and were spectacular for 2010 and 2011, then growth began slowing, clocking in at a measly 2.4 percent for the third quarter. Fourth-quarter estimates, according to Capital IQ, are now at a mere 3.3 percent, as well.

Helping earnings this quarter: Lower energy costs. Hurting: A two percent increase in the dollar.

The key to earnings season are banks ... analysts are expecting a better than 10 percent increase in earnings.

Banks will start off earnings season this week with Wells Fargo on Friday ... and the fourth quarter was a good, but not great, quarter by all accounts.

The bad news: a) topline growth will be flat to slightly up, since many delayed spending on "fiscal cliff" uncertainties; and b) net interest margins will be flat to down further (but that is changing!).

The good news: credit quality continues to improve, commercial loan growth continues to improve, and mortgage banking revenue continued to be the highlight of 2012.

ISI, in a note to clients, noted that total loans for the top 25 banks were up 1.7 percent in the fourth quarter, with particularly strong growth in commercial loans and residential mortgages. Deposit growth was also strong.

Bank were stocks leaders in 2013 ... again. But high prices are a problem. Most large bank stocks are trading near their highest levels in four years. Last week, for example, Raymond James downgraded SunTrust Banks and KeyCorp on valuation.

Bank stocks were up big last week (about 6 percent vs. 4.6 percent for the S&P 500) ... they were up partly on the fiscal cliff deal, but also because the yield curve is finally steepening.

Not by much: The yield curve is still relatively flat, and that will continue to be a drag on fourth-quarter profits, but any improvement is welcome.

A mortgage repurchase settlement is a real positive for banks ... mortgage bank revenues in 2013 should be even higher than the healthy levels in 2012 once all the litigation and settlement costs are factored in.


1) Bank of America's settlement of mortgage claims from Fannie Mae for $10.3 billion ($6.7 billion to buy loans held on Fannie's books and $3.6 billion to cover losses) was well below many estimates. Standard & Poor's for example, noted: "We had estimated that BAC's $22 billion liability [reserve] for mortgage purchases would require heavy additional provisions ... this appears less likely." S&P upgraded the bank's shares to "hold" from "sell" on the news.

More importantly, BAC will fund the payments through existing reserves and a roughly $2.5 billion hit to income, all of which will be recorded in the fourth quarter.

And the bank may still make a small profit in the fourth quarter!

It's incredible ... Bank of America has settled the entire affair using reserves it's already taken, along with a roughly $2.5 billion charge for the quarter!

No wonder investors love special charges ... it puts everything behind everyone

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street