Undoubtedly, you've heard Citigroup's (NYSE:C) good news... the bank only lost $2.5 billion last quarter. It was better than - or should I say, not as bad as - analysts expected, and some investors used it as a reason to keep the rally alive.
While I applaud the company's ability to only perform poorly rather than terribly, I have to also wonder if the apparent immunity to moderately bad news has blinded the market to worthy opportunities in banking.
There were actually a couple of dozen banks reporting earnings on Thursday. Citigroup was one of the three major, national banks with quarterly earnings to announce. The other twenty or so were smaller, regional banks. It would have taken a lot of data mining (which I did) to notice this, but there's a stark disparity between the results of large cap banks and their smaller brethren. Are we enamored by the wrong group?
Bigger Isn't Necessarily Better
It wasn't just Citigroup that turned in disappointing numbers. BB&T (NYSE:BBT) also fell short with its $428 million in earnings. Profitable, yes, but noticeably less than the $458 million it made in the same quarter one year earlier. Had it not been for one-time charge-offs for - do I even need to say it? - non-performing loans, the company would have posted income of $377 million. Wells Fargo (NYSE:WFC) also successfully played the "could have been worse" card, by not losing.
In all fairness, PNC Financial Services Group (NYSE:PNC) did turn in a nice increase in its bottom line from $423 million in 2007 to $505 million for the same three month period in 2007. They may be one of the few bright spots though, as most banks are still suffering from lingering loan write-offs.
In most cases, the write-offs for non-performing loans deemed "one time" charges seem to be recurring each quarter. It's just that a different group of loans is written-off. Wells Fargo is one of several banks that is specifically planning for more charge-offs in the future.
Rally For The Regionals
Perhaps their inability or unwillingness to get involved in subprime loan portfolios was ultimately a good thing for the smaller banks. Though some of these companies are involved with Alt-A and similar loans, most don't have much or any liability on that front. (For more on these higher risk loans, check out The Fuel That Fed The Subprime Meltdown.)
Take a look at July 17's posted earnings from last quarter for a large number of regional banks, compared to analysts' estimated earnings.
|Company||Estimated Quarterly EPS||Actual Quarterly EPS||Market Cap|
|Berkshire Hills Bancorp
|Citizens Republic Bancorp
|Great Southern Bancorp
|Simmons First National
|Zions Bancorp (Nasdaq:ZION)||$0.74||$0.65||$2.81B|
It wasn't all stellar, but two things stick out:
1. There were far more gains than losses, even if the gains were smaller than last year's comps.
2. Several of these smaller and regional banks topped estimates. Not all did, but many did.
Whatever subprime issues were ailing both groups - large and small - seem to not be much of a problem for the smaller banks any longer. Perhaps it's because they have fewer (relatively) non-performing loans to deal with. The big banks still have lots of bad loans on the books, setting up more quarters like this one.
As such, enjoy whatever rally there is from the major banking stocks; I don't think they have the right stuff to sustain the interest. Regional banks, on the other hand, are actually justifying their values with decent results.
For more on evaluating banks, check out Analyzing A Bank's Financial Statements.
Stock AnalysisThe fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
Personal FinanceWhat does an equity research analyst do on an everyday basis?
Mutual Funds & ETFsFind out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
Mutual Funds & ETFsLearn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
Mutual Funds & ETFsFind out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
Mutual Funds & ETFsLearn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
Stock AnalysisMillionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
ProfessionalsThe market has corrected...now what? Here's what you should consider rather than panicking.
Mutual Funds & ETFsTake an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
Mutual Funds & ETFsTake an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
The value of an asset less the value of all liabilities on that ...
An asset that is extremely difficult to dispose of either due ...
When an investor has essentially risked all of his capital for ...
An acronym for Perseroan Terbatas, which is Limited Liability ...
An abbreviation of "limited," Ltd. is a suffix that ...
The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>