This could be the messiest quarter yet for banking companies in terms of missing earnings-per-share estimates.
The gulf among estimates for second-quarter results at many companies is even wider than in the first quarter, when more than half of the roughly 170 companies tracked by KBW Inc.'s Keefe, Bruyette & Woods Inc. missed consensus estimates — just as they did the two previous quarters.
The sketchy earnings outlook means that investors will be paying even less attention than usual to banks' bottom lines in the coming weeks, industry experts said. Instead, they'll continue focusing on two things: credit quality and capital. In other words, they'll be trying to determine if loan losses are easing, and if banks have enough capital to absorb future losses.
"Estimates don't matter as much as underlying trends of credit quality," said Anthony Polini, an analyst with Raymond James & Associates.
Bain Slack, a KBW analyst, said he wouldn't be surprised if even more companies missed the mark in the second quarter, even as Wall Street has pessimistically lowered its estimates for banks during the last three months.
"This particular quarter seems like there's a lot more moving parts than normal," Slack said.
Market watchers blamed capital raisings, stock conversions and special charges that have made it more difficult than ever to predict profits.
"The consensus numbers — if you will — will be very wide of actual results," said Mark Fitzgibbon, director research at Sandler O'Neill & Partners LP. "It's going to be a very noisy quarter."
He and other analysts cited a slew of items that may throw their models wildly off.
Those included the special assessment levied by the Federal Deposit Insurance Corp., charges related to the repayment of federal aid, capital raisings that have diluted shares, and stock conversions that have altered companies' capital structures, among other things.
And then there is the usual, headache-inducing game of guessing how much money banks will have to set aside to cover bad loans.
"We stock up on Advil," Fitzgibbon said.
Slack said the challenges reflected in unusually wide spreads between analysts' high and low estimates in the second quarter.
The average estimate of analysts surveyed by Bloomberg has KeyCorp losing 39.1 cents per share in the second quarter.
The high estimate has KeyCorp losing 8 cents per share; the low estimate is a loss of 59 cents per share.
That's a spread of 51 cents. In the first quarter there was a 26-cent difference between the high and low estimates.
Bank of America Corp., PNC Financial Services Group Inc., BB&T Corp. and Northern Trust Corp. also have higher spreads in the second quarter between their low and high estimates, according to Bloomberg data.
"You've got the FDIC special assessment, you have a lot of banks that have also raised capital," Slack said.
"Share counts are going to be all over the place, especially when you are trying to determine what the average is."
Jeff Davis, a senior analyst with First Horizon National Corp.'s FTN Equity Capital Markets Corp., said the diminished importance of earnings cuts both ways for banks.
On the one hand, they won't necessarily be punished for missing consensus.
Yet a company might also see its shares suffer if it beats estimates while reporting an acceleration of nonperforming assets.
Capital raising in the second quarter has been particularly nettlesome, Davis said.
He held up KeyCorp as an example.
The Cleveland company swapped common shares for preferred stock, raising $540 million in equity while altering its capital structure. That transaction creates a number of potential complications for predicting earnings per share, Davis said.
It may have created a gain if Key repurchased the preferred shares at a discount.
KeyCorp may "use that gain to beef up reserves by making an unusually large provision," Davis said.
Or it might not. The conversion also increased Key's outstanding common stock, diluting earnings per share. There also could be a discrepancy between the number of the company's actual outstanding shares and Wall Street's estimates, Davis said.
"There is just a lot of uncertainty," he said.
So when will earnings and estimates realign?
There were signs that companies were moving in that direction before the unusual activity in the second quarter.
Just 48% of the largest banking companies missed estimates in the first quarter, compared with 88% in the fourth quarter, according to KBW.
Fewer of those companies missed estimates as their executives have become more forthright about their problems, and analysts more pessimistic in their estimates.
Analysts' answers to the question of when earning might return to normal are as varied as their second-quarter predictions.
Slack said not until 2012, at the soonest, because it will take that long for the shakeout from the recession to end.
Fitzgibbon said industry watchers might get a peek at normalized earnings in September.
"The third quarter is likely to be the only clean quarter in the year," he said.
"The fourth quarter is always sloppy and the first two quarters will have unusual items."