Shares in banks and other financials will be weak in coming days as the US foreclosure scandal meets the impact of mixed third quarter earnings reports from the likes of giants such as Goldman Sachs, Wells Fargo and Citigroup.
Goldman Sachs reports Tuesday night as does Citigroup, with Wells Fargo also reporting later in the week.
Citi and Wells Fargo are two of the largest home loan lenders in the US, and among two of the biggest foreclosers, after Bank of America.
All will come under intense questioning from investors and analysts about just what impact of the problem is on their profits and losses.
JPMorgan Chase management attempted to play down the impact in its briefings after the third quarter profit statement last week.
The bank’s shares fell afterwards as nerves hit the sector on more and more disclosures and inquiries.
Goldman Sachs, Wells Fargo and Citi have been implicated in the scandal, although it’s big lenders like Citi, Wells Fargo and Bank of America which have become the focus of regulators and investors.
A national inquiry by all 50 States, supported by the Obama Administration, is now underway, as well as an official probe by the Securities and Exchange Commission.
Although last week’s report by industry leader JP Morgan showed solid earnings growth, it came from lower bad debts and losses, with revenues down, especially in the investment banking side of the business. They are Goldman Sachs’ central strength.
JPMorgan did set aside more money for doubtful loan repayments whereby big investors, such as Fannie Mae and Freddie Mac are demanding non-performing or loss-making mortgages in their big investment pools be repurchased by their originators, such as Citi and Goldman Sachs, plus the likes of Bank of America.
Big European banks, such as Barclays in the UK which purchased Lehman Brothers and Deutsche Bank in Germany, could be impacted if the scandal is as widespread and as bad financially as the pessimists suggest.
US analysts say that any losses from the poor documentation will have to be booked in future quarters, with early estimates ranging from a collective $US10 billion to $US50 billion or more.
No one knows, so that’s why bank shares have been sold off as the problem has snowballed into the national scandal it now seems to be.
Bank shares fell on Friday, but regained some of their early losses in late trading.
But Bank of America (the bank seemingly at the centre of the scandal) shares hit their lowest in over a year, while the KBW bank index fell 2.4%. It fell for all of last week.
In fact Bank of America shares fell 9% last week as the scandal developed. And brokers reported that volume was unusually heavy on Friday with 595.9 million shares of the company’s stock traded, the most since April 2009 and over four times the 50-day moving average. You can bet that much of that was shorting by hedge funds.
There’s also rising concern that banks will face higher costs (it’s estimated hanging onto a foreclosed house for an extra month costs a bank $US1,000 each month).
Foreclosures are running at more than 100,000 a month now, with four million already taken into possession and millions more waiting to be retaken.
But the big concern is that this brings the home market to a screeching halt.
Purchases of repossessed houses are running at 26% or all monthly sales at the moment, and if they dry up, the housing (and home loan) markets will take an awfully large hit.
Analysts say the S&P financial sector is expected to show earnings of $US27.7 billion in the third quarter, up 71% increase over a year earlier, although third-quarter revenue growth is forecast to be down 6%.
Thomson Reuters says that earnings estimates have been cut on some banks with the biggest cuts made to forecasts for Goldman Sachs, PNC Financial and Citigroup.
The scandal has eaten away at confidence in the banks.
Since the latest market rally started in September, the broader US market is up 12%, but the KBW has risen by 4%, with earlier gains being cut in last week’s sell-off.
Until the scandal is resolved and a financial cost fixed, the sector will remain under pressure, at just the time the Fed and the Obama administration is looking to the banks to boost their lending to home owners and business.
It’s for this reason, our bank shares will be weak until the extent and damage caused by the US problem becomes clearer.
The Nasdaq Composite Index rose 33.39 points, or 1.4%, to end at 2,468.77 on Friday, up 2.8% for the week.
But the Dow Jones Industrial Average lost 31.79 points, or 0.3%, to end at 11,062.78, giving it an 0.5% weekly rise.
Shares of General Electric fell 5% after a poor quarterly report on Friday that showed a surprising drop in revenues in its industrial products core, but Google’s 32% third quarterly profit rise boosted Nasdaq.
The S&P 500 Index ended up 2.38 points, or 0.2%, to 1,176.19, giving a gain of 1% for the week.
The indexes have gained between 2.6% and 4.2% this month.
In Europe the Stoxx 600 Index rose 1.4% and took the year’s gain to 4.7% (and more than 15% since the lows of late May).
Markets rose in 16 of the 18 major economies of Western Europe, led by a 3.2% gain for Germany’s DAX, a 1.7% rise for Paris’ CAC, while London’s Footsie was up just 0.8%.
In Asia, Shanghai led the
