U.S. banks will unleash a tide of poor quarterly results over the next two weeks, yet investors may choose to focus instead on when a recovery might be at hand and how much more capital raising and dividend cutting will be needed to achieve it.
The nation's housing and credit crisis has deepened, extending a malaise once concentrated in subprime mortgages to a wide array of debt securities, higher-quality home loans, commercial and construction lending, and perhaps credit cards.
"Earnings are being suppressed by stress on the consumer," said Stuart Plesser, a Standard & Poor's analyst. "What's more at stake is whether banks will need to raise even more dilutive capital. That's a big part of the stress on share prices."
Investor worries have taken a toll on shares of struggling lenders such as Citigroupand Wachovia—and even the relatively healthy JPMorgan Chase .
All three trade below book value, and Wachovia on Wednesday said it might post a quarterly loss of $2.8 billion, much greater than analysts' forecasts, as it tries to slash mortgage risk and cut costs.
The broad-based S&P Financials Index and the KBW Bank Index are both down about 50 percent since their first half 2007 peaks.
Merger activity has shriveled as lenders find it tough to value rivals drowning in bad loans.
Banks have raised more than $120 billion of often-dilutive capital and may need more at higher cost if investors decide they've given the industry enough already. Goldman Sachs analysts in June said $65 billion of capital might be needed.
Morgan Stanley analyst Betsy Graseck Thursday slashed her median forecast for large commercial banks' earnings per share by 37 percent in both 2008 and 2009.
She said banks might need $51 billion more equity capital, and might set aside $265 billion for credit losses through 2010, after reserving just $49 billion in the last three quarters.
"It is too early in the credit cycle to make a valuation call," Graseck wrote.
She urged underweighting lenders with more risky assets or weaker capital: Citigroup , Wachovia , Bank of Americaand .
Big Swings
Investors fear the unknown. Pronounced sentiment swings have left bank stocks in recent weeks regularly falling (and sometimes rising) several percent in a single day.
And while lenders have slashed payouts to preserve capital, the share declines have left many with high dividend yields that may be unsustainable if earnings stay depressed.
Citigroup and KeyCorphave yields of 7.8 percent and 7.1 percent, despite deep dividend cuts.
At Bank of America and Southeast banks Regions Financial and SunTrust Banks , which have not cut dividends, the yields are even higher -- 11.6 percent, 15.8 percent and 9.6 percent, respectively.
Housing problems have weighed particularly on lenders exposed to California, Florida, Michigan and Ohio.
Many lenders have already announced charges or reserve builds likely to substantially reduce or wipe out profit, including Wachovia and the Midwest regional banks Fifth Third Bancorp , KeyCorp and Marshall & Ilsley .
"There's going to be more bad news, more write-downs, more capital raises, more dividend cuts and more asset sales," said Lee Delaporte, director of research at Dreman Value Management in Jersey City, New Jersey.
Washington Mutual , which is the largest savings and loan and raised $7 billion of capital last quarter, has said it expects mortgage losses of up to $19 billion by 2011.
But UBS and Lehman Brothers analysts said the number could grow. Lehman's Bruce Harting said the thrift's total credit losses over that period might reach $30 billion.
Losses Mount
Wachovia, meanwhile, might need to write down much of the $14 billion of goodwill it booked in 2006 when it bought Golden West Financial, a California option adjustable-rate mortgage specialist.
The bank now calls that purchase a mistake, and last week said it will stop offering option ARMs.
On Wednesday, Wachovia tapped Treasury Department Under Secretary Robert Steel, a key figure in the Bush administration response to the housing and credit crisis, as chief executive.
Meanwhile, at Citigroup, Chief Executive Vikram Pandit has had seven months to start a turnaround after more than $46 billion of losses and write-downs since the middle of 2007.
Pandit has pledged to shed $400 billion of assets and is expected to cut tens of thousands of jobs on top of more than 13,000 already announced by the largest U.S. bank.
But a third straight multibillion-dollar quarterly loss is expected, after Chief Financial Officer Gary Crittenden last month warned of possible substantial write-downs.
S&P's Plesser expects further write-downs in the second half, at least until home price declines slow.
"Higher levels of reserving are going to go on a lot longer," he said. "The uncertainty is whether charge-off levels really start to rise significantly quarter-over-quarter."