Banking On Earnings

JP Morgan Chase will be front and center as the first bank to report numbers for the third quarter. But ahead of tomorrow's report financials stocks are taking a breather. Financials have had a strong run since the March 9th lows, with the KBW banking index advancing more than 150% since. The sector led the equity market lower today and a big part of that was the result of Meredith Whitney's downgrade on Goldman Sachs


She reduced the stock's rating to neutral from buy, saying that its rapid rise since Q2 limits the upside potential. Whitney also added that bank stocks are "at least fairly valued" and that she is now "far less bullish" on banks than in the last quarter.

Moshe Orenbuch, Managing Director of Credit Suisse has already been neutral on the sector at large.

He told us on the Closing Bell that "stocks have moved a lot based on normalized earnings, and we don't think everyone gets there at the same speed at the same time."

Key points he's watching for this earnings season:

  • Degree of reserve build, as well as the pace of credit quality deterioration
  • Expect much “cleaner” reported results given the absence of one-time gains vs. Q2

Orenbuch recently made some revisions to his 2009 EPS estimates.

Here are his updates:

  • BAC to $0.45 from $0.75
  • C to ($0.30) from $0.00
  • JPM to $1.70 from $1.75
  • PNC to $2.94 from $3.04
  • WFC is unchanged at $2.00
  • USB is unchanged at $0.95

Orenbuch thinks that in the current environment, JPM and USB are the key winners and stocks to own.

(Disclosure: JPM and USB currently is, or was during the 12-month period a client of Credit Suisse. Investment banking and non-investment banking services were also provided to both companies.)

Also weighing in on the state of banks is John Duffy, Chairman & CEO of Keefe, Bruyette & Woods.

Ahead of ringing the Closing Bell at the NYSE, Duffy said that he would describe the balance sheet today in the financial sector as "precarious in many cases."

That's behind why many of the banks have raised capital, as they aren't "sure when things will turn."

Duffy is also predicting a huge wave of mergers and acquisitions in the sector once "there is certainty in asset valuations. Duffy expect the "biggest mergers to come from the regional sector". With some 8,000 institutions, he expects that number to shrink going forward.

Watch Closing Bell tomorrow at 330p ET for full coverage of financial earnings.

Liza Tan contributed to this article.



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