Bank Stocks Slip, Analyst Forecasts Stay Rosy

Europe is crumbling, but analyst forecasts for bank earnings are holding.

Greece’s May 6 election, which increased the chances for a disorderly breakup of the euro zone, was quickly followed by the disclosure of JPMorgan Chase’s trading debacle.

That double whammy helped to drive Keefe, Bruyette & Woods’ index of large-capitalization bank stocks down by more than 10% in the first three weeks of May.

Meanwhile, average analyst estimates continue to anticipate stable earnings in the year ahead across the index (see the first chart).

Further over the horizon, projections for 2013 and 2014 have wavered little, with analysts penciling in annual growth of about 15% each year as of May 25.

The global downdraft has registered in sell-side research: A tally of estimate revisions for financial companies maintained by KBW shows that downward changes outnumbered upward changes by a bit for most of May. From late February through April, upward revisions had been far more numerous. The brokerage attributed the pivot to dimming expectations for trading revenues the rest of this year.

Consensus views on JPMorgan, which stands to absorb billions of dollars in losses from its changeling credit hedge and suspended share repurchases as a result, have been cut sharply. The average forecast for the bank’s earnings per share this year fell 10% from the end of April to $4.49 as of May 25, and projections for 2013 and 2014 were each reduced by about 3%.

The estimates, however, still anticipate earnings growth of 20% next year and another 11% the following year.

Forecasts for JPMorgan had been edging up most of this year, but the recent revisions put it alongside the softening outlook that has prevailed for Bank of America and Citigroup. (Despite the curtailment of estimates for B of A, analysts still predict rapid improvement in its EPS in the coming years — 56% in 2013 and another 29% in 2014.) In contrast, analyst sentiment on Wells Fargo, U.S. Bancorp and PNC Financial Services Group has generally been improving so far in 2012. (Average analyst estimates for individual companies are shown in the second set of charts.)

In general, analysts have not been good at anticipating the systemic upheavals that have whipsawed bank results over the past half decade. Through late in the summer of 2007, their projections called for earnings to gradually increase in the coming year, when in fact earnings began to tumble in early 2008, and forecasts lagged the strength of the subsequent rebound.

(Analysts also largely left their earnings estimates unchanged during the short-lived rally in the KBW bank index that followed the European Central Bank’s injection of about $1.3 trillion of long-term funding into the Continent’s banks in December and March.)

It is hard to quantify a meteor strike, and until quarterly reports start showing the effects of the recent turmoil, forecasts are likely to reflect the old normal.