Fourth-quarter earnings at the nation's largest banks probably rose 10% to 11% from a year earlier, analysts say, and the results are expected to include stronger market-related revenues and less padding from loan and securities sales.
Still, profits at most large commercial banks changed little from the third quarter, in part because commercial lending has remained weak. Low interest rates continued to squeeze lending margins in the last three months, and the end of the mortgage boom and a slowdown in fixed-income sales reduced earnings in those businesses from their recent record levels, according to analysts.
"You're going to see the big banks that have a presence in the markets report strong numbers in those business lines that are involved in the capital markets," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets in Portland, Maine.
Earnings quality, at least at the large banks, also may have improved, Mr. Cassidy said in an interview. "We also expect that there will be fewer gains on sales of loans and securities this quarter."
Fourth-quarter and full-year profit reports will begin Monday, with announcements from SunTrust Banks Inc. of Atlanta and M&T Bank Corp. of Buffalo.
Investors will be watching for signs of improvement at SunTrust, which has generated little profit growth in recent quarters. SunTrust executives have begun to speak optimistically about a possible turnaround, but Wall Street still expects the company's fourth-quarter profits to be around $1.19 a share, which would be a penny below its results a year earlier and only a penny better than the third quarter.
FleetBoston Financial Corp. and J.P. Morgan Chase & Co. could be among the quarter's bright spots.
Mike Mayo, a Prudential Financial Inc. analyst, says he expects J.P. Morgan Chase to beat the current average estimate of 78 cents a share as tracked by Thomson First Call, with help from improvements in private equity, trading, asset management, and processing. He upgraded the company Tuesday to "overweight" from "neutral."
J.P. Morgan Chase also could benefit from another tactic some banks used during the third quarter: reducing its reserves for bad loans amid improvements in credit quality, Mr. Mayo said.
Fleet, which Bank of America Corp. is poised to acquire this spring, is expected to report improvements in net interest income and margins. And Susan Roth, a Credit Suisse First Boston Corp. analyst, wrote in a research report Wednesday that better credit quality may have allowed it to reduce loan reserves as much as 8% to 10%.
Mr. Cassidy said those factors, along with strong fee revenues and venture capital gains, mean "Fleet is one that could beat the consensus."
Analysts expect Fleet to post earnings of 64 cents a share. That figure would be sharply higher than the 28 cents it posted a year earlier, when it had big losses on loans to airlines, telecommunications, and merchant energy firms. But it would be unchanged from the third quarter, when it reported large gains in its private equity portfolio.
B of A may shift out of the spotlight. The consumer banking giant blew past analysts' estimates for the third quarter, in part because of big profits from selling loans and securities and strong results in all its business lines.
James H. Hance Jr., its chief financial officer, acknowledged in October that loan and securities sales would be lower in the future, including the fourth quarter. And other businesses may not post increases as big as the third-quarter ones.
Brock Vandervliet, a Lehman Brothers analyst, said in an interview that the fourth-quarter results "are going to show some real weakness in a couple of components of revenue."
Analysts on average have B of A earning $1.78 a share, with estimates ranging from $1.68 to $1.92. At the high end of the range, B of A would match its third-quarter performance, though most analysts say profits more likely fell slightly during the fourth quarter.
Mr. Vandervliet, who downgraded B of A's in September to "equal weight," or the equivalent of "hold," recently trimmed his fourth-quarter estimate by a nickel, to $1.77, saying he expects declines in mortgage revenues and lower gains from the sale of loans and securities. He said it will have difficulty meeting revenue growth targets this year, because of external pressures as well as the pending Fleet deal.
Analysts say Citigroup Inc. is likely to report a big improvement in profits from a year earlier, and could beat the current consensus of 89 cents a share. In the fourth quarter of 2002, $1.3 billion of one-time charges ate into the profits. The fourth-quarter 2003 report is expected to be clearer and provide more evidence that the nation's largest banking company has a healthy mix of consumer and corporate banking businesses.
"I think everybody loves Citi at this point," Mr. Vandervliet said. "The great thing about it is that it's really a more balanced business model." Citi also better positioned than many banks to benefit from a market recovery, he said.
Bank One Corp., Wells Fargo & Co., Wachovia Corp., U.S. Bancorp, National City Corp., and other regional banks also are on track to post increases. U.S. Bancorp, however, said Thursday it would restate earnings going back to 1995, because it changed its accounting for stock-based compensation.
But profit scorekeeping among the largest U.S. banks may be a bit misleading when it comes to evaluating longer-term performance. Many analysts continue to expect profits to weaken this year, as growth slows in mortgage and consumer banking revenues. Meanwhile, bank executives warn they are still waiting for a hoped-for revival of corporate borrowing, which remains weak as companies wait to make capital investments or continue to tap other, less expensive funding sources.
"The problem is that we're not seeing this smooth passing of the baton from consumer- to commercial-led growth," Mr. Vandervliet said. "Consumer is nosing over, mortgage is dropping away very powerfully, and yet there's no sign of a pickup in [commercial and industrial] loan demand."
Lori Appelbaum, a Goldman, Sachs & Co. analyst, says the weakening outlook is reflected in a downward trend of analysts' profit estimates for large and regional banks. In a Dec. 31 research note, she wrote that analysts cut earnings for large banks by 0.7% in December, compared with upward revisions the previous two months.
For Standard & Poor's 500 companies, estimates have been raised by an average of 3.8%, she wrote.
