As the nation's largest banks begin filing fourth-quarter and yearend earnings this week, analysts expect mostly positive results. But profits would have been even stronger, they said, if not for the turmoil in overseas markets.
Although trading woes are expected to be limited to the fourth quarter, a slowdown in underwriting and advisory business could translate into dampened earnings for the first two quarters of 1998, analysts said.
"It's not just a one-quarter event," said Thomas Brown of Donaldson Lufkin & Jenrette. "I think the effects will continue into the first half of 1998, with both the trading volume and the profits lower."
Year-over-year comparisons will be difficult because, at least for the first nine months, 1997 was a record year for trading profits among commercial banks, analysts said.
"We've been way above average for a while, and now we're way below," said Lawrence Cohn, an analyst at Ryan Beck & Co.
But declines in trading profits could portend more serious setbacks, analysts said. Credit quality could become the biggest issue for large banks this yearas the full effects of the Asian economic crisis become known.
Citicorp, which has substantial commercial lending business and consumer credit card operations in Southeast Asia, could be affected the most by credit deterioration, analysts said.
"It's inconceivable that there weren't some losses in Asia," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. "But they won't show up for quite a while."
Many analysts have recently lowered their earnings estimates for large banks, according to First Call Corp.
J.P. Morgan & Co. is poised for the biggest letdown, analysts said. The nation's third-largest commercial bank has a business mix more in common with investment banking firms-weighted heavily toward merger advising, securities trading, and asset management.
"Morgan is the most vulnerable, because it is big in emerging markets, even in nontrading activities," said Robert Albertson, an analyst at Goldman Sachs & Co.
J.P. Morgan warned in late December that "lower levels of client activity and lower trading revenues" could impact its fourth-quarter earnings.
Based on analysts' consensus estimates, Morgan's per-share quarterly earnings will be $1.60, an 11% decline from actual per-share earnings in the fourth quarter of 1996.
Chase Manhattan Corp., the nation's largest commercial bank, has also said its earnings would take a hit from trading losses. But analysts said the $367 billion-asset bank made up the trading deficit in November and December. Chase is also expected to report strong growth in U.S. corporate and retail banking businesses.
Citicorp, the nation's second-largest commercial bank, could also feel the sting of Asian economic woes. About 20% of Citicorp's net income comes from the region, analysts said.
Judah Kraushaar, an analyst at Merrill Lynch & Co., said Citicorp, like many of its peers, probably would make up for trading difficulties with growth in other areas of the bank: "I think we will see a 30% to 40% decline in their trading profit, but they will have offsetting securities gains."