Have banks bottomed out?: Despite stock price jump for many this week, analysts see problems continuing

Jul 19, 2008 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- IDMC | Quote | Chart | News | PowerRating -- Don't break out the bubbly just yet.That's the thinking of several bank watchers who, despite seeing financial services stocks end the week on a high note, say the worst probably isn't over as the credit crisis approaches its one-year anniversary.

As the week started, many braced for the worst. IndyMac Bancorp Inc. had just been seized by U.S. banking regulators. And the federal government felt compelled to offer assurances that it would help out mortgage financiers Freddie Mac and Fannie Mae. The news drove down the KBW Bank Index by 8.5 percent on Monday.

But as the week wore on, megabanks Wells Fargo, JPMorgan Chase and, on Friday, Citigroup delivered better-than-expected results. Citigroup posted a $2.5 billion second-quarter loss, or 54 cents per share; analysts were expecting a 66-cent-per-share loss.

Meanwhile, of the four Chicago-area banks that have released second-quarter earnings, two got a bump in their stock price after numbers were released.

Could the worst be over?

Hardly, said BMO Financial Markets analyst Peter Winter.

"Analysts are falling over themselves to lower earnings estimates," Winter said. Wells, Chase and Citigroup "beat very low expectations, and the quality of the earnings is not good."

Also, the economy shows signs of weakening, he said.

"The feeling is that credit problems are contained now in residential mortgage areas, but there are signs that the problem is spreading to auto loans, credit cards and commercial lending," Winter said.

By the end of the first quarter, many investors and analysts assumed banks had written off their bad loans and that profits would improve, said William Blair & Co. analyst David Long.

"That thesis proved wrong," Long said. "While second-quarter earnings have been better than expected in some cases, the bar was set pretty low."

And earnings could get worse.

"The peak for adjustable-rate-mortgage resets is the third quarter," he said. "So many consumers current on their mortgages today will experience an increase in their monthly mortgage payments of several hundred dollars, which may lead to additional mortgage delinquencies in the second half of the year and into 2009."

Another bank watcher also believes the uncertainty will continue into next year.

"The credit crunch will continue to be the significant wild card into 2009 and perhaps the most significant capital markets shock of the last two generations," said Stephen Wood, Russell Investments senior portfolio strategist.

No bounce for Old Second

While many bank stocks rebounded, Old Second Bancorp Inc. of Aurora didn't get a hoped-for bounce Friday after announcing second-quarter results beat forecasts.

On a day when the Dow Jones industrial average closed up 0.4 percent, Old Second stock closed down 0.9 percent, at $13.81.

Earnings per share rose to 53 cents on $7.3 million of net income. Analysts' consensus called for earnings of 47 cents a share.

Asked why its stock dipped after the positive news, Chief Financial Officer Douglas Cheatham theorized it's because Old Second enjoyed a run-up in recent days. After closing at $11.51 Monday, it had appreciated by 21 percent after Thursday's close of $13.94.

"When some of the bank announcements came out, people decided that the sky wasn't falling, and we had a bump the last couple of days," he said.

In the year-ago period, Old Second earned 45 cents a share on $5.7 million in net income. The recent period includes results for newly acquired HeritageBanc Inc.

Old Second, which has 35 west suburban branches, set aside $1.9 million in the second quarter for potential loan losses, more than triple its provision in the same period last year. The reason: Non-performing loans rose to $30.7 million as of June 30, up from $5.2 million in the year-ago period.

Nearly two-thirds of the non-performing loans are related to six Chicago-area home builders that have been hurt by the real estate slowdown. Most are for completed available-for-sale lots, but there are some completed and partially completed homes, as well as some vacant land.

Other local results

On Thursday, Rockford-based Amcore Financial Inc. reported an unexpected loss and saw its share price tumble 4.7 percent. On Friday, it closed up 5.6 percent, at $4.73.

On Wednesday, shares of Northern Trust Corp. gained 13.1 percent after the Chicago area's only big locally headquartered bank reported second-quarter profit that exceeded analyst expectations. On Friday it closed at $78.13, down 0.5 percent.

Also Wednesday, shares of First Midwest Bancorp Inc., another area midsize bank, gained 26.5 percent after it, too, exceeded profit forecasts despite a rise in delinquent loans. It closed Friday at $19.23, unchanged.

Banks reporting earnings next week that are either headquartered here or have significant operations here include Fifth Third, Midwest Banc, TCF, Wintrust Financial, MB Financial, Bank of America and National City.

byerak@tribune.com

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