Winners and Losers in Banking
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US banking sector has been having a rough time for the past few years. The future is not going to be getting easier anytime soon. The IMF just announced that the European debt crisis is going to hurt world growth in 2012. This is a fear shared by many come to life. World growth for 2012 has been revised down to 3.5% from previous estimates. This number is skewed higher due to China's influence on the world economy. China, the world's largest economy, is slowing to an annualized rate of 8.5% or lower from recent double digit growth. Many economists fear China has entered a period of extended economic slowdown as the country's economic cycle progresses. Europe is also expected to decline in 2012. Perhaps shrinking as much as a half percent. The individual economies of PIG countries Greece and Portugal are both supposed to contract between 3-6%.
The US domestic economy is also expected to slow in 2012. Recent estimates put US GDP growth around 2.5%, down from the previous 3.5%. Fall out from the US housing and financial crisis is dissipating but some damage lingers. More than 90 banks failed in 2011. Charges stemming from the crisis and ensuing market crash were over $10 billion in 2011 for Bank of America (BAC) alone.
There are some bright spots in the banking sector though so I don't count it completely out. Regional banks are showing the same signs of life as their larger counterparts but without the baggage. US Bancorp (NYSE: USB) and Fifth Third Bancorp (NASDAQ: FITB) both reported increases in revenue and earnings based on gains in mortgage sales, deposits and customer services. US Bancorp's reported earnings came with a number of positive supporting factors. Net income was up 6% over the previous quarter and 38% higher than the previous year. The company earned over $.60/share on increased net revenues in lending, deposit services, interest income and fee based services. There was one expense of note concerning mortgage servicing but it was offset by a gain from positive litigation. The company reported 17% gains in lending activity and deposit balances.
Fifth Third Bancorp is also making money. This regional bank reported fourth quarter net income of $1.3 billion, translating to $.33/ share, a 17% decline from the third quarter. The bank has been performing strongly this year, full year earnings are up 87% from 2010. However, $.17, about 14%, is from TARP related gains in the first quarter. Fifth Third is in good position to make more gains in 2012. Credit trends in their accounts are favorable and organic revenue is on the rise.
Bank of America's (NYSE: BAC) recent earnings were disappointing. The company posted profits of $.15/share compared to consensus estimates of $.23/share. Analysts had expected a larger gain in revenues from core business and lending. Net income is reported as $2 billion but most of the gains are attributable to favorable accounting and sale of China Construction Bank, which sold for $2.9 billion. Non-recurring income was offset by expenses for mortgage related litigation totaling $1.5 billion. Excluding proceeds from the sale of China Construction Bank, Bank of America barely broke even in 2011. The fourth quarter statement should not have been a surprise as much of it was included in the previous quarters statement. The company is currently chained with debt and an inability to make money. Revenue from business practices are all down on a year over year basis. Uncertainty in the banks future and possible further mortgage related charges will keep investors away. Bank of America needs to reduce it's debt and raise actual revenue for the stock to advance. I don't think its going to happen in 2012.
The company did make improvements to the balance sheet in preparation for future growth. Cash raised throughout the year will help with Bank of America's continued success. However, losses in real estate and investment banking have to be overcome for Bank of America to be profitable. Bank of America is currently trading around $7.30, up roughly 40% from the first of the year. Since the report Bank of America has been trading sideways on average volume.
Citigroup (NYSE: C) reported earnings and revenue that also fell short of consensus estimates. Fourth quarter earnings of $.38/share are 5% lower than in the same period last year. Net income and revenue both fell in the quarter from the previous year, 11% and 7% respectively. The company blamed weak bond trading and a decrease in revenue from investment banking and increased operating expenses. Net income for the year is up 6% on 14% growth in Citicorp loans. Credit losses, a major cause of the US financial crisis, declined by 33% in 2011. It is obvious that Citigroup is taking steps to right itself following the US mortgage crisis. However, this “solid progress”, as CEO Vikram Pandit states it, has failed to spark any real profits. Citigroup has resorted to the same accounting shenanigans as Bank of America.
Citigroup and Bank of America need to focus more effort on repairing their balance sheets. They need to do this by focusing on customers. Too much time and money are being wasted shuffling numbers on their income statements and balance sheets. The smaller banks have proven that business is still good. They are in excellent position to profit. Watch for continued revenue growth from Fifth Third and US Bancorp and watch out for unseen expenses popping up for Bank of American and Citigroup.
In the exchange-traded fund arena, the Financial Select Sector SPDR (NYSEMKT: XLF) has been trending sideways since the market crash in 2008 and 2009. The sector lost more than half its value. The chances of it coming back this year aren't promising. Earnings from banking giants JP Morgan, Citigroup and Bank of America failed to stimulate investor appetite in banks and the lack of interest is apparent. The financial Spyder is currently trading around $14, bouncing off two year lows. The stock isn't looking strong and is probably heading down. The financial Spyder is a perfect pick for a long term option strategy like a covered leap. The current price on January $15 calls is about $1.05. This is 7.5% of current price, around $14.15, and discounts the stock to a support level. It also leaves 6% upside for a total gain of 13%.
IUMFool has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup, Fifth Third Bancorp, and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.