As posted by: Wall Street JournalBanks and savings institutions in the U.S. appear headed for their first overall quarterly loss since 1990, as troubled loans pile up faster than the federal government's unprecedented efforts to aid the battered industry.
Since posting combined profit of $1.7 billion in the third quarter, already a 94% plunge from a year earlier, life has gotten even worse for the roughly 8,300 financial institutions with deposits backed by the Federal Deposit Insurance Corp. Rising unemployment is causing more agony from old problems such as shaky mortgages and credit cards, and losses now are spreading to commercial real-estate loans.
"The earnings power for this industry has absolutely collapsed," says Eric Hovde, chief executive of Hovde Capital Advisors LLC, a money-management firm in Washington that specializes in financial services.
Nearly a quarter of U.S. financial institutions reported a net loss for the quarter ended Sept. 30. The percentage is likely to climb when fourth-quarter results are announced in January, with some analysts predicting that even stalwarts like J.P. Morgan Chase & Co. could tumble into the red.
Earnings estimates for the New York company, ranked No. 1 in stock-market value among U.S. banks, range from a loss of 20 cents a share to profit of 71 cents a share, according to Thomson Reuters. Hitting the average analyst estimate of 11 cents a share in net income would translate into about $410 million, down 86% from the $2.97 billion profit the firm churned out in last year's fourth quarter.
A J.P. Morgan spokesman declined to comment.
The glum fourth quarter is an ominous sign for 2009. The U.S. government so far has poured $169 billion into more than 130 financial institutions through its Troubled Asset Relief Program, according to Keefe, Bruyette & Woods Inc. But some banks already are looking for more money or hoarding their existing capital in expectation of another awful year.
Fifth Third Bancorp, which got $3.45 billion from the federal government, two weeks ago slashed its quarterly dividend to a penny a share from 15 cents a share. In June, the Cincinnati regional bank cut its dividend for the first time in three decades.
Kevin Kabat, Fifth Third's chairman, president and CEO, cited the recession and job losses as contributors to the industry's "very difficult environment," adding that "we do not expect improvement in the near term."
Horizon Financial Corp., a Bellingham, Wash., bank with fewer than two dozen branches, last week suspended its dividend entirely "due to the current uncertainty in our markets." Horizon also announced plans to close one of its branches.
In the past few weeks, some analysts have cut 2009 earnings forecasts and stock-price targets for a slew of big and small banks. These analysts expect rising unemployment to trigger deeper losses on credit cards, mortgages and home-equity loans as more consumers fall behind on their bills. Combined with newer problems rippling through commercial real-estate and other types of loans, many banks will need to bolster loan-loss provisions, eroding profits further.
"We believe that deteriorating economic conditions will cause asset quality to get worse in 2009, revealing the inadequacy of loan-loss reserves and impairing profitability," Jonathan Glionna, an analyst at Barclays Capital, said in a report earlier this month. Nonperforming assets among the 27 financial institutions he covers will rise to $125 billion in the fourth quarter from $43 billion a year earlier, he estimates.
By the end of next year, the figure could top $200 billion, he said. Financial institutions consider loans to be nonperforming assets when the borrower is behind on payments and it appears that default is likely.
The U.S. banking industry last reported a combined net loss in the fourth quarter of 1990, according to the FDIC. The $2.3 billion net loss came near the end of the savings-and-loan crisis, which included failures of more than 1,000 U.S. banks and cost taxpayers about $130 billion.
So far this year, 25 banks have failed, but regulators are worried that at least another 200 banks may be at risk of collapsing. The potential fourth-quarter loss is a far cry from the record $38 billion in profits posted by the U.S. banking industry during the third quarter of 2006.
As conditions worsen, struggling banks are expected to turn to private-equity firms and other outside investors for capital. Even some of those getting a government infusion may need more capital, analysts warn. Interest in shoring up financial institutions is rebounding as regulators warm up to granting bank charters to nonbank investors.
Mr. Hovde, the money manager, says he has been approached recently by some banks and is considering taking stakes in some institutions. Such infusions typically dilute existing shareholders.
"The common shareholder is still at risk," says Brian Klock, an analyst at Keefe, Bruyette & Woods in San Francisco. The firm, which specializes in financial services, expects per-share earnings at large U.S. banks to fall 6.8% in 2009 from this year.
The best-case scenario is that banks will bottom out in the middle of 2009 if the economy starts to rebound. Far more likely as the U.S. recession spreads around the world, analysts and bank executives predict, is additional pain for bank profits and investors.
