Analysts' failure to foresee declining earnings per share for the biggest U.S. banks last year hasn't stopped them from predicting an even bigger profit surge for 2012.
The six largest lenders, including JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc., may post an average profit increase of 57% this year, according to 184 analysts' estimates compiled by Bloomberg.
A year ago, analysts predicted profit at the banks would climb 32% in 2011. Instead, earnings per share probably fell 18% as the economic recovery analysts counted on never took hold. Improved trading results, more investment-banking deals, expense-cutting measures and lower credit costs will lead to the increase in earnings that didn't materialize last year, analysts say.
That may provide a boost to stock prices after financials were the worst-performing industry in the U.S. in 2011. "The banks could get some positive operating leverage in 2012 from trading normalizing and expenses normalizing," said Chris Kotowski, an Oppenheimer & Co. analyst in New York who estimates at least an 18% earnings-per-share increase for each of the six banks.
"It's not like all the news on the banks was uniformly bad all the time. The market had a bigger freakout than the companies did." Banks' trading results were decimated as Europe's sovereign-debt crisis deepened, protests helped topple governments in the Middle East and Africa, and an earthquake and tsunami in Japan triggered a nuclear meltdown.
Bank stocks fell along with earnings last year and were the worst performers among 10 industries tracked within the Standard & Poor's 500 Index. Financials dropped 18.4%, led by a 58% plunge for Bank of America. Goldman Sachs dropped 46%, while New York-based Citigroup Inc. and Morgan Stanley both declined 44%. JPMorgan, the largest U.S. bank by assets, was down 22% and Wells Fargo & Co. 11%.
The broader S&P 500 Index was unchanged for the year. The increase in 2012 earnings will be led by Morgan Stanley and Goldman Sachs, which are most reliant on trading and investment-banking revenue, analysts estimate. They predict the New York-based firms will more than double earnings per share in 2012, after missing 2011 targets by the most of the six banks. Revenue from trading and investment banking may rise about 8.5% for the industry, according to Kian Abouhossein, a London-based analyst at JPMorgan.
That may help reverse a two- year slide in overall revenue as those areas account for about a quarter of total revenue at the five biggest Wall Street banks. Any revenue growth may boost the profitability of banks as they also seek to reduce expenses. Bank of America said last year it would chop $5 billion in annual costs, and Morgan Stanley and Goldman Sachs have targeted at least $1 billion. All three firms say they will eliminate positions, part of a wave of more than 230,000 job cuts announced by financial companies worldwide last year.
"The earnings ramp-up is a return to some kind of normalcy in trading activities and deal flow, as well as tighter control on expenses," said Fred Cannon, an analyst at KBW Inc. in New York. "It would be kind of depressing to forecast financial- market activity in 2012 as being like it was in 2011."
Banks may also benefit for a third consecutive year from improving credit quality, according to Andrew Marquardt, an analyst at Evercore Partners Inc. in New York. Net write-offs and loan-loss reserves will approach "normalized" levels in 2012, Mr. Marquardt estimated in a Jan. 2 note.
A decrease in reserves accounts for all of the expected 25% increase in earnings per share at Bank of America, he wrote. Jason Goldberg, an analyst at Barclays Plc in New York, wrote in a note Tuesday that loan growth probably will accelerate in 2012. Loans at the four largest U.S. banks, net of loan-loss allowances, increased 0.3% in the nine months ended Sept. 30, company filings show. That compared with consensus estimates of 2% growth at the big banks, Brian Foran, an analyst at Nomura Holdings Inc., wrote in March.
"The risk of not owning U.S. bank stocks is greater than owning them," wrote Mr. Goldberg, who projects an aggregate 21% increase in earnings per share for JPMorgan, Bank of America, Citigroup and San Francisco-based Wells Fargo. "Headwinds from 2011 should subside in 2012."
