Expectations are low as several key U.S. banks prepare to deliver fourth-quarter results this week.
The industry is suffering from declining revenues, a weak economy and anxiety about the state of European sovereign debt. To make matters worse, banks face tougher regulations as they continue to shake off the effects of the financial meltdown in 2008 and 2009.
In the last few weeks, analysts have backpedalled on their bullish outlooks, slashing their forecasts as the extent of the slowdown on Wall Street has become more apparent.
This week will show how bad the downturn really is. Citigroup Inc. and Wells Fargo & Co. announce results on Tuesday. Bank of America Corp. and Goldman Sachs Group Inc. release their reports Thursday. Morgan Stanley steps up to the podium Friday.
Investors got a good sense of what to expect last Friday when JPMorgan Chase & Co. detailed a disappointing fourth-quarter performance. The nation's largest bank by assets said profit fell 23 per cent from a year earlier. While the drop was in line with expectations, JPMorgan's 17 per cent decline in revenue was not, and investors knocked about 3 per cent off the stock.
The major U.S. banks will close out 2011 with a whimper, says Ian Jaffe, an analyst with RBC Capital Markets LLC. Return on equity for large financial institutions probably remained less than 10 per cent last quarter, except at Wells Fargo and U.S. Bancorp, he adds.
Ultra-low interest rates are hurting banks' net interest margins, while trading and investment banking fees have been shrinking due to nervous investors and stricter regulations, which include larger capital requirements and limits on so-called proprietary trading, in which banks use their own capital to invest.
JPMorgan's investment banking revenue fell 30 per cent last quarter to $4.4-billion (U.S.). That bodes poorly for Goldman Sachs and Morgan Stanley. Both of the big investment banks have been cutting costs in recent months as they struggle to come to terms with their new environment, which has them moving out of riskier asset plays that used to generate big profits.
Goldman Sachs could report its worst performance since going public in 1999, according to some analysts. Its core trading business is shrinking and the consensus on the Street is for a 58 per cent decline in share profit on a 26 per cent decrease in revenue.
Looking for new avenues of growth, Morgan Stanley has been expanding its fixed-income business and its wealth-management service. But the firm is still expected to post a $922-million loss for the last three months of 2011, generated in part by a massive legal settlement.
On the positive side, U.S. banks are proving to be conservative with their capital management and their balance sheets should continue to strengthen, Mr. Jaffe wrote in a research note last week.
The star of the season is likely to be Wells Fargo, which is expected to report that profit increased by more than fourfold, to a record $15.3-billion. The San Francisco-based bank has relied less on risky Wall Street tactics than its larger rivals, JPMorgan and Citigroup. As a result, it now boasts a market value greater than both those competitors.
Meanwhile, analysts expect Citibank to show a 34 per cent gain in share profit and a very slim rise in revenue. And Bank of America is expected to swing to profitability on a 7 per cent gain in revenue.
Some options traders are becoming increasingly bullish on Bank of America, betting that things can't get much worse after the stock plunged 55 per cent last year – the worst performance among companies on the Dow Jones industrial average. The number of "call" options to buy Bank of America shares has surged to nearly twice the amount of "put" options to sell them. That is the most bullish ratio in a decade, according to Bloomberg.