Bankers enjoyed a break during third-quarter earnings season as they fielded fewer questions about losses from soured loans and more about what their profits might look like after the financial crisis.
Executives say they were able to talk about topics like the markets their banks serve and their expanding profit margins on lending rather than the still-nasty state of their loan books. Preprovision earnings — gross profit, excluding taxes and the money banks set aside to cover current and future loan losses — is the basis for Wall Street's gauge of bank earnings once loan losses abate.
"Nobody asked us about 2009 earnings," Huntington Bancshares Inc. chief executive Stephen Steinour said in an interview on Oct. 22, the day his company reported a $166.2 million third-quarter loss, 33% wider than in the second quarter. "Frankly, they want to know what 2011 looks like."
Under normal circumstances, investors would be skeptical about bank earnings excluding the provision for loan losses. Loan performance shows how well a bank is run.
But with the financial crisis losing speed, "most people are looking beyond the quarter," said Mark Batty, an analyst at PNC Wealth Management. Investors want to focus on which banks will be ahead after the crisis — provided they have enough capital to cover their loan losses.
KBW Inc.'s investment bank, Keefe, Bruyette & Woods Inc., said that third-quarter, core pretax, preprovision earnings rose slightly from the second quarter at the banking companies that make up the BKX benchmark bank stock index. The rise suggests that such earnings bottomed in the second quarter, said Thomas Michaud, Keefe Bruyette's president.
Some banking companies are visibly pulling ahead of others. The annual return on assets Wells Fargo & Co. generates from preprovision earnings lagged U.S. Bancorp's until the second quarter, when the San Francisco company moved past the Minneapolis one, and in the third quarter it again ranked No. 2, at 3.49%, and U.S. Bancorp was third, at 3.38%.
Capital One Financial Corp. tops Keefe Bruyette's list of banks with the best returns; in the third quarter, it generated 5.58%.
Huntington's return was 1.59%, ranking the Columbus, Ohio, company No. 15 — below Citigroup Inc.'s 1.72% but ahead of Bank of America Corp.'s 1.51%.
Fifth Third Bancorp's stock rose 6.8%, to $10.80 a share, after it reported a $97 million third-quarter loss on Oct. 22 — compared with an $882 million profit in the second quarter.
The company's core preprovision earnings were $530 million, but Chief Financial Officer Daniel Poston told investors to expect preprovision earnings in a normal economy to exceed $600 million. In the third quarter, the Cincinnati company was ranked 10th on the Keefe Bruyette list, with a return of 1.95%.
The focus on future earnings power does not mean investors ignore earnings shocks. Shares of Cullen/Frost Bankers Inc. fell more than 4%, to $48.54, after it reported an 18% rise in third-quarter profit from the second, to $44.7 million.
Frank J. Barkocy, the director of research at Mendon Capital Advisors Corp., said investors were spooked by the rise in delinquent and charged-off loans at the San Antonio banking company.
