Earnings season is upon us and I think it bears remembering that earnings season has generally been associated with very bad news for banks over the past two years. Every earnings season is filled with surprise writedown announcements and capital shortfalls in the banking sector. We should expect this earnings season to be no different.
Witness the recent announcements regarding UBS, HSBC, Deutsche Bank, Bank of America and JPMorgan Chase as examples.
First is UBS. Earlier this week, the reports were they could report full year 2008 losses of as much as 20 billion Swiss francs due to a particularly nasty fourth quarter. Remember, this is a company that has been one of the hardest hit globally as it has reported over $50 billion writedowns to date. Shares in the Swiss giant have come under attack as a result. Moreover, UBS is too large to be bailed out by the Swiss government. There is no sovereign or super-sovereign entity like the European Union to prop up UBS. So, traders are anxious to hear positive news about the firm because a UBS failure would mean a real Armageddon scenario for global finance.
Next is HSBC. This bank has cruised through the credit crisis after initially coming under fire two years ago with massive losses at its Household International unit, which had enormous U.S. subprime exposure. HSBC was generally seen to have best weathered the credit crisis amongst global banks along with Banco Santander, JP Morgan Chase and the whole lot of big-five Canadian banks. However, a report just yesterday from Morgan Stanley suggests that the bank is undercapitalized to the tune of $30 billion. This prognosis has been a major source of volatility in financial markets, sending bank shares diving and the VIX, a common measure of market volatility, above 50.
Then comes Deutsche Bank. The company also cruised through the subprime crisis with a minimum of writedowns. However, the fourth quarter hit the company hard and they pre-announced a massive loss of $6.4 billion just today. This announcement has also rattled markets because Deutsche had been seen as another stable global bank. Nevertheless, with commercial property becoming an issue, I fully expect Deutsche to demonstrate more exposure here and to suffer increased writedowns. Rumors are now circulating that the German government will need to prop up the bank.
At Bank of America, we should realize they took on a lot of risk with Countrywide Financial and Merrill Lynch, two firms which would have failed. In my view, these two companies are serial writedown magnets, much as Citigroup and UBS have been. Their lending/asset profile was extremely risky. Bank of America will now pay the price for taking on this risk. And rumors are now circulating that they will need federal monies to successfully complete the Merrill Lynch acquisition. You should note that the Seattle Federal Home Loan Bank recently suspended dividends because of its precarious state. Its largest borrowers were Merrill Lynch and Washington Mutual.
That brings me to JPMorgan Chase, which acquired Washington Mutual. Jamie Dimon, the JPMorgan CEO, is already on record as having said this will be a terrible quarter. Given what we know about the Seattle Home Loan Bank, we should assume we are going to see tens of billions in writedowns here. As a result, JPMorgan has moved up its earnings announcement. (Update 15 Jan 2009: those writedowns were taken by Washington Mutual before they hit JPMorgan Chase’s books. So, we did not see the $32.5 billion of writedowns to WaMu’s assets that JPMorgan Chase announced it would take. All in all, the earnings report was very good despite some nearly $3 billion in writedowns. So, JPMorgan Chase may have moved up the announcement to demonstrate how good earnings were. See my note here.)
I don’t even need to mention Citigroup because they have been all over the news. I would note, however, that their continued viability as a going concern is again in doubt despite the TARP funds rescue package they have already received.
In the end, you have to conclude that earnings season for banks is always a very bad affair. I have said it before, but it bears noting here: writedowns are at the core of the credit crisis, deleveraging and debt deflation. Most experts are seriously underestimating the amount of writedowns still needing to be taken. As usual, it takes earnings season to wake people up to the fact that there are many more writedowns to come.
Sources
UBS down 5 pct on reports of heavy loss – Reuters
HSBC may need $30 billion: Morgan Stanley – Reuters
Deutsche Bank warns of big losses – BBC News
Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P – Bloomberg.com
Seattle FHLB Likely Short of Capital on Mortgage Debt – Bloomberg.com
U.S. Negotiating More Aid for Bank of America – WSJ.com