Third quarter looking bad for banks
The recommendations established in the Basel II accords hope to ensure banks exposing themselves to greater risk hold greater capital to shield their depositors.
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The banking sector is poised to take another deep breath and announce third quarter earnings. The first announcement was due from JP Morgan Chase next week, but Bank of America jumped the gun and made its surprise announcement yesterday. Earnings were down 68 percent over the same period last year. The bank also said it would halve its dividend to help it build capital. CEO Ken Lewis said he hadn't seen such difficult conditions for banks in his 39 years in the business. All of which wouldn't seem to bode too well for other banks. Ashley Milne-Tyte reports on what we can expect from those third quarter statements.
Consumers are fleeing the stock market and stashing their savings. That's good news for banks who need the deposits to cope with tight credit conditions and a mound of delinquent loans. But it won't be enough, says Bernie Baumohl of the Economic Outlook Group.
Bernie Baumohl: I think what the banks are really struggling to do is to cleanse their balance sheet and improve their capital because that's really the only way they'll be able to lend again, in the future, is if they have some extra capital as a cushion against future losses.
Behemoths like Bank of America and JP Morgan Chase bought a bit of a cushion when they acquired other institutions. Stuart Plesser covers the banks for Standard & Poor's. He says that gives them the edge over their competitors.
Stuart Plesser: So that when this is over there's going to be a clear bifurcation in the banking space where the bigger players will have a clear advantage of those who didn't have the capital to make the moves that these banks have made.
It still may not be enough. Bank of America said yesterday it's padding its cushion by raising $10 billion. And it's still not clear when the write-downs of those poisonous investments will end. Gerard Cassidy of RBC Capital Markets says the third quarter will be bad, but there'll be worse to come.
Gerard Cassidy: When the banks report their fourth quarter results in January we will see the proverbial kitchen sink quarter where the banks will throw in everything at the end of the year to try to clean up the books for 2009.
He says early next year could be the peak for bad bank news.
In New York I'm Ashley Milne-Tyte for Marketplace.