This is the real week for earnings season where the floodgates open.  That is particularly the case for some of the top banks, investment banks, and brokers.  Goldman Sachs Group, Inc. (NYSE: GS) is on deck for Tuesday July 14, and the quality of this one will be key for  setting the trader bias on banks and brokerage firm stocks.  JPMorgan Chase & Co. (NYSE: JPM) and Charles Schwab Corp. (NASDAQ: SCHW) July 16, and Bank of America Corp. (NYSE: BAC) and Citigroup Inc. report on Friday, July 17.

There is going to be a real wild card in the mix here at all banks and brokers.  The multitude of accounting items will make comparable earnings irrelevant, but will give the bulls and bears plenty of ammunition for their arguments.  We have compiled more details on Thomson Reuters estimates and have listed our key focal points for each company today.

Investment banking revenues and a continued flurry of refinancing activity helped banks and brokers during late Q1 and into Q2 before the refi-slowing came back into effect.  Add in a steep yield curve with Fed Funds at a near-zero target and you have a winner.  The key that could derail the recovery is loan loss reserves and formal write-downs for Q2.  Banks and brokers do not give financial guidance for a quarter out or a year out, but this will set what some analyst models may try to start treating as normalized earnings now that there was a full quarter where the financial world was on the verge on collapse.

The banking indexes are up and up big from the March lows.  Many banks are up well over 100%, an unprecedented recovery after the panic during Q1.  But a second concern is going to be what is expected to be the rising delinquencies among commercial and industrial loans.  Many feel this is the next canary in the coal mine.

Goldman Sachs Group (NYSE: GS) is on Tuesday and will be a strange earnings report.  We already have them beating estimates.  Meredith Whitney made that call after another upgrade last week.  Goldman is out from under the TARP, so we will wait to see how it accounts for that payback and buyout proceeds.  We have heard that prime brokerage operations has shown an improvement as hedge funds are starting to operate more normally again.   Equity underwriting was weak on IPOs but was strong for secondary offerings, while debt sales were strong from financial institutions raising TARP repayment or capital cushions and as other companies were finally able to sell debt after a two-quarter lock-down in those markets.  While we have $3.48 EPS as consensus, the call last week and the Meredith Whitney call today is going to set a benchmark much much higher.  Whitney put this at $4.65 EPS, and we think the investment banking giant needs to hit well above the $4.00 mark for any remaining upside to be the norm.

JPMorgan Chase & Co. (NYSE: JPM) is reporting July 16.  Estimates are $0.04 EPS on $25.8 billion in revenues.  Frankly, this number seems as though it should be higher and we would immediately note that it is very possible Jamie Dimon was far too cautious or too pessimistic in his Q2 interviews.  It now has the old legacy Bear Stearnsbusiness in the mix as well as the Washington Mutual and therefore the old Providian.  This may be opinion, but foreclosures and credit card losses here just seem much higher because of its acquisitions rather than because of its own internal core high-credit-quality members.

Charles Schwab Corp. (NASDAQ: SCHW) is out on July 16 will be he trend-setter for TD Ameritrade Holding Corp. (AMTD) and E*Trade Financial Corp. (ETFC).  Estimates are $0.18 EPS and $1.08 billion in revenues  All online brokerage firms had relatively strong trading revenues and trading transaction volumes, and the question is how well the real loan losses are still hurting the core earnings from operations.  We are not looking for any decent income from short-term interest, an we think that the competition for deposits may have created a rat race that put pressure on margins in non-brokerage areas.  If Schwab can manage to beat earnings significantly, that may stabilize both E*TRADE and TD Ameritrade who both report earnings next week.

Bank of America Corp. (NYSE: BAC) is July 17 with estimates at $0.26 EPS on revenue of $31.7 billion.  These new figures include Merrill Lynch and Countrywide, so the old comparison to $0.72 EPS and $20.6 billion top-line a year ago has little to no worth. Delinquencies and write-offs are what we will again hone in on.

Citigroup Inc. is also July 17 and estimates are for a loss at -$0.26 EPS on close to $22.4 billion in sales.  The key issues to watch here are not just the numbers.  We will be watching the restructuring progress and will be honing in on the split between what seems like a “Good Citi” and “Bad Citi”… plus the status on that Morgan Stanley venture with Smith Barney that we feel will ultimately become a full unit of Morgan Stanley.

By Thursday’s close, we should have a very clear picture what the post-earnings reaction bias toward major banks and brokerage firms will be through the rest of this earnings season.

Jon C. Ogg
July 13, 2009

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