Don’t Trust Bank of America ‘Earnings’ — or Any Financial Stock

BAC report this morning was ugly, but what's new?

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Wells Fargo (NYSE:WFC) third-quarter earnings missed expectations as the financial stock’s loan business didn’t grow fast enough. The revenue trend for WFC also is ugly — with six straight quarterly reports that show year-over-year declines. Not inspiring.

A massive one-time accounting gain allowed Citigroup (NYSE:C) to eke out its seventh consecutive quarterly profit, but subtract paper a paper gain of $1.9 billion related to the risk of its debt and “mark-to-market” accounting shenanigans, and the $2.2 billion in profits shrinks to a very unimpressive level. Revenue is all over the place, ranging from a low of $8 billion a quarter to a high of $74 billion a quarter in the past six earnings reports. The company just can’t seem to get ahead.

True, financial stocks have a tough row to hoe right now. Persistent troubles with bad mortgages and bad debt are eating away the bottom line. Fewer qualified borrowers are out there thanks to the tough job market and black marks on credit reports because of other economic hardships Americans have had to endure.

But that’s all academic. Aside from the fact that financial stocks willfully created the subprime mortgage bubble, Wall Street isn’t much interested in excuses. Investors want to identify profits and risks — nothing more.

Do Not Bargain Hunt in Bank Stocks

Unfortunately, the financial sector continues to be a story of big risks and little opportunity.

xlf Don't Trust Bank of America 'Earnings'    or Any Financial StockConsider the Financial Select Sector SPDR ETF (NYSE:XLF) is off 25% so far in 2011, showing how banks have been holding back the market. If you look at the blue line on this chart, which represents the moving average, you’ll see that the downtrend is obvious and is showing no sign of abating. Even though the market has been gyrating up and down, this financial ETF has shown zero signs of life.

Banks’ core business of consumer and business lending has failed to prop up the bottom line, and that’s not just bad news for the economy — it’s also bad news for the financial sector. Slow lending growth means slow profit and revenue growth, too. And unfortunately, the weight of bad mortgages means the demand for growth and a thriving lending business is bigger now than ever before.

Of course, those weasel-like financial stocks have other ways to juice their numbers. Bank of America is looking to bridge the holes in its balance sheet by gouging consumers with a $5 debit card fee. BAC also is looking to raise cash selling off many of its assets in a bid to raise enough capital to meet new banking regulations and prop up its bottom line.

So what’s the takeaway for investors? The bottom line is that it’s impossible to tell when bank earnings will improve. And that, amid other lingering uncertainty over European debt and unemployment and consumer spending, is enough to make you think twice. Yes, there was a brief respite for BAC stock when Warren Buffett bought in with a $5 billion deal for preferred shares. And there have been occasional moments of strength across a day or two as the market hit an updraft.

But by and large, financial stocks are frontrunners in market declines and lag behind when things turn around. It’s difficult to imagine the sector has bottomed — and if recent earnings reports are any indication, it could be quite some time before there is any sign of hope in the banking industry.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2011/10/bank-of-america-earnings-nyse-bac-financial-stocks/.

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