JPMorgan Chase (JPM) beat its numbers, as did Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C). Now the question is, what happens to the banks in the second quarter and beyond.
My expectation at this point is that the second quarter will be fine, especially for investment banks with trading desks that generate huge profits from trading Treasuries and other bonds. However, the third quarter may well be a different story.
It will be the first step in the sorting out and sifting of the banks — money center versus investment banks versus regionals. The Street will be looking at the economic outlook for 2011, and will have much higher earnings estimates than it did for 2010, and will be focusing more and more on banks that have trading desks and investment banking operations that can generate profits — and also on those that do not.
But JPMorgan’s home equity write-offs rose to 4.59% compared to 3.93% in the first quarter of 2009; subprime charge-offs were 13.43% compared to 9.91% in the first quarter of 2009, and prime mortgage write-offs were 3.1% compared to 1.95% in the first quarter of 2009.
Meanwhile, more than 1 million mortgage holders who have not made a payment in several months (or more) have not been put into default and foreclosure. They are essentially living rent free while they wait for the other shoe to drop; and when that shoe does drop, it will land squarely on the banks’ balance sheets.
Which banks are most vulnerable to a weak third quarter and possibly bad news coming even sooner? They are the regionals, which have huge exposure to commercial mortgages and no investment banking operations to offset losses.
Given JPMorgan’s weak report from its commercial and consumer lending operations, it’s hard to see the regional banks producing good numbers or forecasts any time soon.
For this reason, I am recommending buying puts on Huntington Bancshares (HBAN) and KeyCorp (KEY).
Huntington is a weak bank whose shares have more than doubled during the market rebound of the past year. Get positioned now on the short side for some big profits in the coming few months.
Buy the HBAN Oct 5 Puts (HQB 101016P00005000) under 50 cents and the KeyCorp Jan 7.50 Puts (XBM 110122P00007500) under $1.15. Please use limit orders only.
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