Bank stocks endured another steep selloff Monday as investors focused on how the global financial crisis may have cut into third-quarter earnings.
The Standard & Poor's bank index opened lower and stayed there, closing down 4.1% even as the rest of the market enjoyed a late afternoon rally. The S&P bank index is now off 15.7% since Jan. 1. The Dow Jones industrial average fell 0.8% Monday, or 63.34 points, to 7,721.35.
A sobering report on third-quarter earnings prospects from one of the most influential analysts helped ignite the selloff.
Henry C. Dickson, bank analyst at Salomon Smith Barney, forecast that third-quarter median earnings would be up only 11.8% on an annual basis. In the second quarter he had forecast 14.7% annual growth.
Third-quarter earnings reports are expected to be especially ugly for the big money-center banks, which have already warned investors to expect hundreds of millions in trading losses. Earnings at these banks are also expected to suffer from the worst quarter for underwriting in years, and big drops in their venture capital investments.
Wall Street's consensus expectation is for a 50% rise in earnings at Citicorp to $1.51 per share, according to First Call Corp., but that number is distorted because some analysts are including earnings of Travelers Group in advance of the two companies' merger to form Citigroup.
Reflecting global anxieties, Citicorp shares-which were trading comfortably into the triple figures and hit a 52-week high of $180.875 in July-have plunged to $86. The company has warned investors that trading losses will cut third-quarter earnings by $200 million.
Meanwhile, Travelers has been dealing with troubles of its own. The company has reported that its Salomon Smith Barney investment banking unit lost $360 million in July and August.
"The thinking about Citigroup is different now than it was five weeks ago," said David S. Berry, director of research at Keefe, Bruyette & Woods Inc., at American Banker's quarterly Analysts Roundtable. (A transcript of the discussion will be published later this month.)
"There has been a $3 billion adverse swing in Citigroup," he said, explaining that the combined company was expected to report $5 billion in earnings this year, but now will likely report $2 billion.
Industry analysts have tried to promote regional bank stocks throughout the selloff that began in July, by arguing that they are shielded from adversity by their lack of loan exposure to Asia, hedge funds, or drops in underwriting.
But some are starting to reconsider that position.
"Our revenue growth forecasts of 10% (for the regionals) just don't feel right, so we might cut them some more," Mr. Berry said.
Continued declines in short-term interest rates, combined with the current historic lows in long-term rates, Mr. Berry said, could cause income derived from the spread between the rates to fall-and that is the chief source of income for regional and community banks.
But focusing on earnings may be a moot point by now, said Richard X. Bove, bank analyst at Raymond James & Associates.
By the time most analysts get around to cutting earnings forecasts, he said, most sophisticated investors have already fled the stocks and the damage has been done.
The questions investors must face now, he said, are not whether earnings will fall, but just how much danger banks face from the crises in Russia, Asia, and in hedge funds.
"What are the true value of the assets in the company?" said Mr. Bove. "What is the real equity in the company?"
"The fact is when we've asked these questions before, we find out that the assets aren't worth what was thought, and the equity is less than supposed."
The best hope for investors, said James K. Schmidt, portfolio manager at the John Hancock Regional Bank Fund, is that the myriad difficulties plaguing banks are resolved and booked quickly so companies can begin with a clean slate next year.
But with government and banking officials grappling with what is being called the worst financial crisis since World War II, it may be a while before earnings recover at the biggest banks and the entire sector gets back on its feet, analysts say.
"The second quarter (of 1998) was extraordinary and there was incredible optimism," said Nancy A. Bush, a bank analyst at Ryan, Beck & Co. "Now times are tough, and it reminds us that banking is a cyclical industry."