Today, analysts at Goldman Sachs issued bearish comments on the banking sector, cutting earnings estimates for three of the largest U.S. banks. The analysts commented this morning on recent secondary issues from Bank of America (BAC), and Wells Fargo (WFC), Citigroup (C). They cited recent equity raises were three of the five largest secondaries ever in the history of U.S. business. The total raised to date is $325 billion for the banks according to Goldman.
The biggest use of cash so far has been to pay down borrowing, which has declined by $500 billion, or 21 percent during the year for the banks.
Goldman analysts think the cash will eventually be used to make loans, citing data for the fourth quarter that lending is about even this quarter compared to a 4 percent decline for the third quarter. Commercial loan growth generally resumes one to three years after economic recessions hit bottom.
The firm’s analysts adjusted earnings estimates for the banks as follows:
- Bank of America 2010 earnings per share estimates raised 4 percent to $1.30, 2011 earnings per share dropped 10 percent to $2.25.
- Wells Fargo 2009 earnings estimates cut 21 percent to $1.66 per share, 2010 earnings increased 5 percent to $2.25 per share, and 2011 earnings flat at $3.00 per share.
- Citigroup 2010 earnings per share estimates dropped 3 percent to 20 cents, 2011 earnings reduced 13 percent to 35 cents per share.
Goldman maintains “Buy” ratings on Bank of America and Wells Fargo. Citigroup is Not Rated.
Remaining bank failures could be about 3 percent of the banking system’s total assets, according to the Goldman’s analysts. They base this on historical benchmarks during 1988-1995 regional economic downturns.
These downgrades in the banking sector come on the heels of the Meredith Whitney Advisory Group reducing earnings estimates for investment banks Morgan Stanley (MS) and Goldman Sachs (GS) last week. The Group cut fourth-quarter profits expectations for Goldman from $6.38 to $6.00 a share. Goldman’s 2010 earnings were reduced from $21.73 to $19.65 a share and 2011 was cut from $24.04 to $20.60 a share. The Morgan Stanley 2010 estimate was cut from $2.63 to $2.60 a share, while the 2011 forecast of profits was reduced from $3.28 to $2.75 per share.
With the House of Representatives approving a financial system reform bill on December 11 and the Senate poised to take up the issue early in 2010, the broad outlines of what is on the plate for banks is evident. The House bill is nearly 1,300 pages long and represents a stringing together of several bills introduced earlier. It addresses a large spectrum of regulation, from oversight by the Securities and Exchange Commission, shareholder rights, Sarbanes-Oxley compliance, Financial Accounting Standards Board governance, "too big to fail" banks, and other provisions. Banks could find their missions and organization much changed when the final version of this bill reaches the President’s desk for signature.
In related news today, New York Times columnist Andrew Ross Sorkin has noted that leading banks were paying themselves significant fees (roughly 2.5 percent of the offering price) to pay off TARP obligations. Bank of America's $19 billion offering resulted in $482 million, Citigroup's $17 billion offering raised $425 million, and Wells Fargo's $12 billion offering added $276 million in fees.
The bottom line is that the financial sector is facing substantial political and economic headwinds that could lead to lower share prices as we enter the new year. Cautious investors may find it prudent to lighten up on company stock in the financial sector in light of all this negative sentiment.
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