More than ever, investors are being forced to read between the lines in the earnings reports issued by the biggest banking companies.
As banks merge, their quarterly earnings reports are becoming increasingly convoluted. They often contain a dizzying array of one-time gains, merger-related costs, and "nonrecurring" charges that seem to recur over and over.
The myriad charges complicate matters for those who try to assess companies based on their "run rate," or core performance.
Initial investor response to bank earnings statements appears to be negative, though most of these reports appear solid on the surface.
Typical is the response to U.S. Bancorp's fourth-quarter statement. The Minneapolis banking company Wednesday reported "record operating earnings" of 52 cents per diluted share, a healthy 15% increase from a year earlier.
But later in the press release, the company said it had incurred $28.1 million of what it called "nonrecurring, merger-related charges" in the fourth quarter, some of which stem from First Bank System Inc.'s acquisition of the old U.S. Bancorp, a deal that closed in August 1997.
Add in these charges and the company's earnings fell to 48 cents per share-not too shabby but not a 15% increase, either.
U.S. Bancorp's stock fell $1.375 Thursday, to $31.125, and J.P. Morgan Securities analyst Catherine Murray downgraded the shares to "market perform" from "buy." She said revenues appear lower than expected, and she estimates that earnings will grow only 12% in 1999 instead of the 20% she forecast earlier.
U.S. Bancorp's practice of spreading out "nonrecurring" charges is not unusual. With capital markets seen as less reliable after last summer's economic volatility, and profits from lending shrinking, many big banks are forced to resort to numbers-juggling to hit their earnings targets, analysts said.
"The quality of earnings has clearly deteriorated," said Charles W. Peabody, a banking analyst at Mitchell Securities. "That's often a prelude to outright earnings disappointments."
Bank One Corp.'s fourth-quarter earning statement ranks among the most complex issued by any bank.
The Chicago-based company reported 88 cents per share of earnings, a 17% gain over the same period a year earlier, before accounting for $1.159 billion of charges, including $984 million stemming mainly from last year's merger of Banc One and First Chicago NBD Corp.
But getting to the 88 cents promised Wall Street, wasn't easy.
Deep within its earnings statement, the company showed that it reported only $935 million of "merger-related and restructuring charges"-the most the Securities and Exchange Commission would permit, a spokesman said. The remaining $49 million was reported as "other noninterest expense."
Mr. Peabody said the lower restructuring charge helped boost Bank One's earnings.
Markets continued to sputter on Thursday. The Standard & Poor's bank index dropped 1.2% and the Dow Jones industrial average fell 71.83 points, to 9,264.08.
Also on Thursday, shares of Bankers Trust Corp. rose 62.5 cents, to $87.0625, after the company reported fourth-quarter earnings of 89 cents per share. It marked Bankers Trust's highest stock price since Nov. 30, the day the company agreed to sell to Deutsche Bank.