Bad quarter for banks...but just how bad?
Citigroup, JPMorgan Chase and other banks will take it on the chin when they report fourth-quarter results. But will results be worse than expected?
NEW YORK (CNNMoney.com) -- Call it the case of same story, different quarter for the nation's banks.
Later this month, many big banks will report their results for the fourth quarter. And once again analysts are bracing for yet another bleak performance.
Bank of America CEO Ken Lewis warned in an internal memo earlier this week that the company's 2008 performance fell short of expectations. And JPMorgan Chase chief Jamie Dimon sent financial stocks spiraling lower in mid-December when he suggested that his company's quarterly performance would be dismal.
Both banks, which each made two major acquisitions last year as a result of the turmoil, are at least expected to remain in the black. But their earnings are likely to be far below the profits they enjoyed in recent years.
Bank of America (BAC, Fortune 500), which will report its results on Jan. 20, is expected to report a profit of $1.39 billion, or 15 cents a share, up sharply from last year's grisly fourth quarter, according to consensus estimates by Thomson Reuters. But it's well below the results of $5.41 billion, or $1.19 a share, in the fourth quarter of 2006.
Earnings at JPMorgan Chase (JPM, Fortune 500) are expected to plummet 83% to $482 million, or just 4 cents a share.
And many other banks are also expected to take a hit.
Profits at Wells Fargo (WFC, Fortune 500) will tumble 17% from a year ago, according to Thomson Reuters. And Citigroup (C, Fortune 500), which has been arguably the hardest hit among the group, is expected to book its fifth consecutive loss, this time hemorrhaging close to $3.8 billion, or $1.14 a share.
"It was always going to be a bad quarter," said Marshall Front, chairman of Chicago-based money management firm Front Barnett Associates. "The question is how bad is it going to be?"
Fearing the worst, analysts have slashed their forecasts for several banks in recent months. At JPMorgan Chase, for example, current estimates are for the company to report a profit of 4 cents a share. Just a month ago, analysts were expecting a profit of 27 cents per share.
The last three months of 2008 rank as one of the toughest periods on record for the nation's banking sector. Financial institutions were still coping with the collapse of Lehman Brothers and Washington Mutual in September, and banks faced heavy Congressional scrutiny over their lending practices after getting funds as part of the $700 billion rescue program.
But deteriorating credit conditions, which took a severe turn for the worse during the quarter as the recession deepened and unemployment headed higher, was arguably the biggest challenge for banks.
Analysts are now betting that banks will aggressively set aside cash this quarter to cover future loan losses as more consumers are likely come up short on their both home equity and credit card payments.
"Most of the stress will come from the consumer portfolio," said Chris Mutascio, managing director at Stifel, Nicolaus & Co. in Baltimore. He added that there could be more pressure on commercial loans, which have typically tended to be more stable.
Oppenheimer analyst Meredith Whitney warned clients earlier this week that she expected Bank of America and JPMorgan Chase to double their loan loss reserves this quarter. Combined with Citigroup and Wells Fargo, she anticipated the group would add an additional $9.5 billion to their reserves.
Banks with investment banking operations, most notably Citigroup and JPMorgan Chase, are also likely to feel an additional pinch as initial public offerings and merger activity remain at a standstill.
Fortunately for them, these and other financial institutions appear to have enough cash to cope with the abysmal banking environment.
Since Congress passed the massive rescue package in October, the nation's four largest banks by assets - Citigroup, JPMorgan Chase, Wells Fargo and Bank of America - have received $120 billion in government funds.
Overall, the government has invested $187.5 billion in 215 banks so far.
Nevertheless, industry observers including Marshall Front will be keeping a close eye on banks' capital levels. A dip in Tier 1 capital levels or tangible common equity, two closely-watched measures of a bank's ability to absorb losses, could signal that an institution may have to raise capital in the future, he said.
Bank of America and Wells Fargo will probably blame this quarter's lackluster results in part on costs related to their acquisitions of brokerage giant Merrill Lynch and Wachovia respectively.
And the pain at Citigroup will certainly be tempered by its recent sale of its German retail banking operations for $6.6 billion, notes Joe Scott, a senior director at Fitch Ratings who tracks the company.
"That gives them a little more wiggle room," said Scott.
Analysts also anticipate that leading banks should be able to attract more deposits as consumers flock to larger institutions that are perceived to be more stable as a place to park their cash. Both JPMorgan Chase and Bank of America reported a surge in deposit growth during the third quarter.
And banks may even report improvement in their net interest margins, a measure of how profitable their deposits are, thanks to recent rate cuts by the Federal Reserve.
But the biggest wild card for bank earnings could be how they value their assets after a brutal end to a difficult 2008. Aggressively clearing off their balance sheets from bad loans could help them start 2009 with a clean slate, notes Stifel's Mutascio.
However, given next year's troubling economic outlook, Mutascio cautions that this quarter will not be the proverbial "kitchen sink" that investors have anticipated for so long, where banks flush their balance sheet clean.
Given the state of the economy and credit-related issues, big banks are certain to face more tough quarters in the coming year, he said.
"You will see more [ugly numbers], no doubt about it." 
