More banks could join the red-flag parade

After warnings by Citi and UBS, JPMorgan and others could follow with bad news of their own, though retail banking could lessen the pain.

By David Ellis, staff writer

NEW YORK ( -- Citigroup and UBS may not be the only banks breaking bad news to investors this month.

Analysts warn that other retail banks that report quarterly earnings in October, including JPMorgan Chase (Charts, Fortune 500) and Washington Mutual (Charts, Fortune 500), could suffer similar pains.

Before Monday's opening bell, Citigroup (Charts, Fortune 500) warned that its third-quarter earnings could fall 60 percent because of its exposure to subprime-backed mortgage securities.

That announcement came just hours after Swiss-banking giant UBS (Charts) said it would take a take a writedown of $3.4 billion and post a loss in the third quarter because of subprime-related losses.

The announcement by UBS and Citi actually comforted some investors worried about the bank's exposure to subprime losses. In fact, the stock of both banks rose on the news. Still, the warnings do not bode well for an already battered banking sector.

Investment vs. retail banks

Banks such as Citi and UBS had made a killing slicing up bonds backed by home loans to borrowers with poor credit. That all changed after this summer's subprime crisis.

JPMorgan, which is scheduled to report earnings later this month, is likely to endure a hit similar to Citigroup's, said Bart Narter, a senior analyst at at the independent research and consulting firm Celent.

"They will show some losses," he said, pointing to JPMorgan's similar mortgage-backed securities business and potential problems in its own investment banking division.

Right now, the overall financial sector is expected to post some pretty dismal results during the third quarter as a result of this summer's subprime mortgage meltdown. Earnings are expected to grow just 3 percent, according to Thomson Financial.

That's a far cry from 34 percent earnings growth during the same period last year. It even lags the expected earnings growth rate of 3.8 percent of the larger S&P 500 universe.

What may redeem JPMorgan and insulate companies like Bank of America (Charts, Fortune 500) and Wells Fargo (Charts, Fortune 500), however, is the fact that they rely heavily on their retail banking business - an area of that appears to be holding up quite well.

"I think that is an important distinction here - are you a bank or an investment bank?" said Jim Bradshaw, a senior vice president and analyst with D.A. Davidson & Co. "Purer (retail) banks just aren't nearly as exposed and their results will come out with narely a blip."

Savings and loans

Savings and loans players such as Washington Mutual (Charts, Fortune 500), which also reports earnings later this month, may also see their quarterly results feel a subprime sting.

By definition, savings and loans hold mortgages, unlike banks such as Citigroup that convert them into investment products.

By taking on more risks, lenders like Washington Mutual are left holding the bag if loans implode, said Bradshaw.

"That is hurting them," he said. "Clearly they will have some tough earnings comparisons."

Even if Washington Mutual takes a big earnings hit, it could be a couple quarters before investors see those losses disappear from their balance sheets, said Bradshaw.

More woes ahead?

Following Monday's warning by Citigroup, CEO Charles Prince said he remained optimistic about the company's future, adding that he expected to "return to a more normal earnings environment" during the fourth quarter.

Some analysts, like Punk Ziegel & Co.'s Dick Bove, aren't convinced.

With the dollar in flux, questions lingering about the domestic and foreign economies and uncertainty prevailing about the Federal Reserve's next move, Bove said there is no way for Citigroup to know if the debt crisis will persist.

"When you get a systemic debt problem, you just can't whack at it once and it goes away - it stays." Top of page