Thursday, 13 December 2007

More financial confessions

On Monday it was Washington Mutual, yesterday it was Freddie Mac and today 3 more large financial companies visited the confessional. From

Banks raise loss estimates

Some of the nation's largest banks on Wednesday warned of higher losses in the fourth quarter as the turmoil in the credit and mortgage markets continues to weigh on the financials sector.

Bank of America (BAC) Chief Executive Ken Lewis said the firm would have to write down a larger amount of its investment in some debt securities than previously planned.

"Based on conditions today, we expect those write-downs will be larger than have already been reported -- although obviously we won't know our final numbers until we close the fourth quarter," Lewis said in remarks prepared for delivery at a Goldman Sachs conference.

The company had previously expected to report a write-down of $3 billion. Lewis also said that while fourth-quarter results will be "disappointing," the company will still report a profit.

"While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing. At this point, the final write-downs of CDOs are unknowable, but we expect to be profitable in the fourth quarter," Lewis concluded....

He said the firm now expects provision expense at $3.3 billion in the fourth quarter, reflecting increased reserves of about $1.3 billion. Bank of America is also looking to rebuild it capital ratio, like all its rivals.

Lewis said he's planning to get the bank's Tier 1 capital ratio to 8%; that means there won't be any share buybacks until at least 2009.

It also means they will be raising capital or cutting dividends or both.

Also Wednesday, Wachovia Corp., (WB) in a Securities and Exchange Commission filing, said it now estimates its loan-loss provision for the fourth quarter will be about $1 billion in excess of charge-offs.

Its previous forecast was between $500 million and $600 million due to slowing loan growth and ongoing deterioration in its loan portfolio.

Surprise, surprise, losses are now larger than were expected, who would have thought?

In a separate regulatory filing Wednesday, PNC Financial Services Group Inc. (PNC) said it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

The revised expectation is due to write-downs on its $1.5 billion of commercial mortgage loans held for sale and lower trading revenue as a result of "unprecedented market price volatility," PNC said in the filing. It also expects to take a charge of $141 million before taxes on its stake in money manager BlackRock Inc. (BLK).

Did someone say Commercial real Estate? Interesting, forget about dropping shoes it's raining shoes and the storm is not about to let up for some time.

So what you say? More bad news from a sector that has already been beaten down severely. That's just the point, the bottom callers (and there have been a lot of them) and the analysts that think it's time to buy financials have been and are still now dead wrong.

Not only that, as has been written here repeatedly over the last 6 months earnings estimates for 2008 are far too high and need to come down. Some brokers have already started downgrading for 2008. The most recent from Merrill Lynch yesterday who cut their 2008 estimates for BofA by -6.7%, for JP Morgan by -7.5% and Wachovia by -2.5%.

Economist David Malpass of Bear Stearns, a fairly smart guy said a couple of days ago it's a bit early to be calling an earnings recession because we need to see 3 - 4 quarters of year over year earnings declines before you can make that call. The

4th quarter is going to be the second consecutive quarter and whilst 2008 forecasts look rosy (currently expected to be 15.6% higher according to S&P500 operating earnings forecasts) expect them to come down substantially in the next few months.