A leading bank analyst is warning that bank profits are vulnerable to further surprises arising from the real estate debacle.
Thomas Hanley of Salomon Brothers expects a continuing free-fall in commercial real estate to hurt bank profits for the third and fourth quarters more than many analysts predict. If he is right, some bank stocks may be overpriced.
Though he has named only one bank, Mr. Hanley appeared to imply that the tremors will be more widespread.
"My own impression is we haven't seen the worst of it," he said. "You could see some sloppy earnings during this quarter and probably more during the fourth quarter."
Last week, Mr. Hanley cut his earnings estimates for First Chicago Corp., citing concerns about the bank's real estate portfolio.
"In an industry atmosphere that we expect to be plagued by real estate issues for at least the balance of 1991, we no longer expect the shares to outperform the market," he wrotes in a report on First Chicago.
Mr. Hanley now expects First Chicago's third-quarter loan loss provision to be $150 million to $175 million, not the $100 million he had been anticipating. That will cut operating earnings by 40 cents to 50 cents a share, he said. He now expects 1991 earnings to be $2 a share, not the $2.85 he had predicted.
Valuations will drop further on properties that have already been labeled as troubled, Mr. Hanley said. The sales that do take place these days tend to be distress sales, and they in turn push down valuations on comparable property.
Moreover, he said, appraisers are making conservative judgments about vacancy rates and rent levels when they evaluate buildings.
First Chicago is not the only bank to face continued weakness in its real estate portfolio, Mr. Hanley said.
Citicorp chairman and CEO John Reed reportedly told a group of business executives in late September that he expects the bank to be writing off bad real estate loans made in the 1980s well beyond 1993, and that he expects real estate prices to eventually decline 30% from the highs of the 1980s.
In addition to Citicorp and First Chicago, big banks such as Chase Manhattan Corp., Bankers Trust New York Corp., Bank of New York Corp., and Chemical Banking Corp. have high levels of nonperforming commercial real estate assets.
Other analysts appear less concerned than Mr. Hanley. Frank R. DeSantis Jr. of Donaldson, Lufkin & Jenrette said that real estate problems will level off and banks with adequate reserves will start generating earnings growth from other areas.
"You don't need a recovery in the market for real estate in order to get a recovery in earnings for banks," he said.
Raphael Soifer, an analyst at Brown Brothers Harriman, said commercial real estate will continue to be a problem at some institutions, but a number of banks will see their real estate problems level off.
Some Pockets of Stability
Citicorp and Chase Manhattan, which have exposure to real estate markets nationwide, could see some further weakness in their portfolios, he said. But "values seem to have stabilized in some regions."
Few analysts have changed their earnings estimates on major banks in recent weeks, according to Zacks Investment Research. Two analysts cut and one analyst raised earnings estimates on Citicorp in September, for example.
As for First Chicago, the consensus estimate for the bank's 1991 earnings is $2.60 a share, well above Mr. Hanley's $2-per-share astimate. Only two other analysts cut their estimates, and the cuts were smaller, according to an official at Zacks.
Major bank stocks were mixed on Tuesday as cautious equity investors waited for third-quarter earnings results and Friday's unemployment report, which may signal a further cut in interest rates.
The most active issue was New York's Citicorp, after Mr. DeSaints of Donaldson Lufkin reiterated a buy rating. The stock was ahead 37.5 cents, to $14.875, on late-afternoon volume of 1.3 million shares.