Two-thirds of the nation's top 25 banks topped Wall Street's third-quarter earnings predictions as consumers continued to borrow and use credit cards and the costs of bad corporate loans shrank.
But the strong showing masked a variety of worries, including a lack of corporate loan growth, a continued narrowing of margins, and questions about how banks will replace revenue they will lose as the mortgage and fixed-income booms fade.
Still, as the dust from the reports settled last week, most analysts seemed pleased with what they saw.
"Over all, EPS growth was stronger than we expected," Lori Appelbaum, an analyst at Goldman, Sachs & Co., wrote in a research note Wednesday. The 25 large banks she covers posted median earnings per share growth of 10% from a year earlier, which topped her forecast of 7%.
Mike Mayo, an analyst at Prudential Insurance Co. of America, wrote in a note Thursday that most large banks "showed progress" during the third quarter as problem areas from previous quarters, including bad loans, capital markets, venture capital, and Latin America, began to recover.
"Prior ugly areas became less ugly," wrote Mr. Mayo, who is one of Wall Street's most bearish bank analysts and rates the sector as a whole as "unfavorable."
However, earnings quality was a bone of contention for some analysts, who noted a slight deterioration as banks booked higher gains from securities and loan sales or cut their provisions for bad loans.
Susan Roth of Credit Suisse First Boston Corp., called the quarter "generally better than expected" but described the earnings quality as only "fair."
"We'd be more enthused were it not for the fact that so much of the quarter's upside was generated through the use of loan-loss reserves," she wrote in a note Thursday.
Bad-loan ratios continued to fall at many large banks, in some cases to levels not seen in three years, and some companies reacted by making smaller additions to their loan-loss reserves. At several large banks, including FleetBoston Financial Corp., Citigroup Inc., Bank of America Corp., and Wachovia Corp., provisions were smaller than chargeoffs for the first time in years, even though overall reserve ratios improved.
While the savings from lower provisions may have boosted earnings by a few pennies, the move also raised concerns.
Christopher Marinac, an analyst at FIG Partners LLC in Atlanta, said he expects more banks to goose their earnings by making smaller provisions. "At some companies that's a good thing, but at other companies, it's not," he said in an interview.
Meanwhile, the third-quarter results also included a few noteworthy performances, at least in terms of analysts' expectations and year-to-year growth in operating profits.
J.P. Morgan Chase & Co.'s earnings per share more than quadrupled from a year earlier, to 78 cents, beating analysts' estimates by 2 cents. Bank of America's earnings per share rose 32%, to $1.92, topping the consensus by 24 cents.
Wachovia's profits climbed 24%, to 88 cents, Citi's rose 22%, to 90 cents, or 6 cents more than analysts expected. Earnings per share at UnionBanCal Corp. (which is majority owned by Mitsubishi Tokyo Financial Group Inc.) rose 19%, to $1.02, 8 cents better than expected.
But profits at other companies, such as KeyCorp of Cleveland, and PNC Financial Services Group Inc. of Pittsburgh, fell from a year earlier, hamstrung by low interest rates and the slow economic recovery.
The wide difference in results among the large banks prompted a disagreement among executives over whether the long-awaited recovery has taken hold.
In an Oct. 20 research note, Mr. Marinac of FIG Partners called the diverging opinions "A Tale of Two Economies." One set of bankers painted the economy as "an upbeat, accelerating backdrop that has momentum," but another group took a more "dour view," saying their companies have yet to improve, he said.
Dina Dublon, the chief financial officer at J.P. Morgan Chase, described the New York company's outlook clearly in a conference call with analysts Wednesday. "The question is what is the growth potential from here. In 2004, we expect to see a different mix of earnings but will count on a higher level of earnings only when we have greater confidence in this trend of the economic recovery."
KeyCorp's CFO, Jeff Weeden, told analysts on an Oct. 16 conference call that "While we are seeing signs of improvement in general market conditions, we believe that the near-term environment will remain challenging for revenue growth."
But Bank of America's CFO, James H. Hance Jr., was one of the optimists. "We still think the tone is very good, the economy is in fact picking up," he said in an Oct. 13 interview.
Mr. Marinac said that if the economy continues a slow recovery, "I wonder if this is the kind of environment that's going to separate the wheat from the chaff." The banks "that seem to have their acts together are the ones that are not complaining [about the economy], and the companies that are complaining are the ones that have the poor earnings."
