One day before Wall Street giants Bank of America and Goldman Sachs report their quarterly earnings their stocks are getting hammered on concerns about the U.S. debt-ceiling and increased tension over the European debt crisis following bank stress test results.
Financial stocks dropped across the board today as a result with the Financial Select SPDR ETF down 1.7% today. And while the S&P500 is up 3.52% this year the Financial ETF is down 8.4% in the same period symbolizing a still-struggling banking sector.
Nuveen Investments analyst Alan Villalon says investors sentiment is poor overall right now and much of it is the result of macro-economic concerns. "You have the European debt concerns and the U.S. debt ceiling concerns taking the focus from some positive earnings coming from JPMorgan and Citigroup, for instance," he says.
"The unfortunate thing right now is that investors are digesting good news as bad news and bad news as worse news. That's why you see JPMorgan and Citigroup trading lower while their numbers relatively solid," Villalon adds.
Bank of America which reports tomorrow how well (or bad) it did in the second quarter is seeing its shares get hammered. Shares of the nation's largest bank were down 4% earlier to $9.62 and are down 27% year to date. BofA is now the worst-performing bank in the KBW Bank Index which tracks 24 U.S. banks.
BofA investors are selling ahead of the bank's earnings report and following the bank's $8.5 billion settlement with institutional investors over mortgage-backed securities. Analysts expect BofA to post a second quarter loss of 90 cents a share tomorrow on $12.34 billion in revenue.
Reports today noted that the massive settlement may force BofA to build its capital cushion by $50 billion. As Bloomberg noted:
Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares.
Meanwhile Goldman Sachs is also struggling to get love from investors in the day leading up to its earnings annoucement. Goldman dropped 1.3% to $128.49 late this morning before picking back up to trade around $129.51. The drop marked it's lowest price since May 2009.
The investment banking powerhouse is expected to report a profit of $2.27 per share on revenues of $8.14 billion tomorrow.
Rival Morgan Stanley was also suffering today as investors sent its shares down to their lowest price since March 2009. This afternoon Morgan shares were trading at about $20 and were down 2.6% on the day. Morgan expected to report a loss of 62 cents per share when it reports on Thursday on revenue of $8 billion.
The investment bank has been struggling to show major improvements across its business lines particularly in the firm's fixed income trading unit. Bloomberg reports that Morgan Stanley missed an internal trading-revenue target by more than 40% last year and is under massive pressure to show improvement. From Bloomberg:
The fixed-income unit failed to deliver on a promised revenue increase last year, leading to the missed target, according to a person with direct knowledge of the figures. It has been beset by management turnover, weak markets, bad bets and a struggle to win back clients lost when the firm retrenched during the financial crisis, according to interviews with nine current and former executives who requested anonymity because they weren’t authorized to speak.Chief Executive Officer James Gorman, 53, is looking to prove to investors this week when results are reported that the firm is advancing toward his goal of boosting market share in fixed-income trading by 2 percentage points. With the stock down 69 percent since 2006 to $21.09 last week, Colm Kelleher and Ken deRegt, both 20-year veterans of the company, aim to succeed at a task that has taken down three senior executives.
“I’m absolutely surprised at how slow it has been,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who has a “buy” rating on the firm’s shares and is a former Morgan Stanley treasurer. “I’d love to tell you what the trajectory is going to be, but I don’t know how rapidly one can come back.”
The financial sector has been particularly sensitive to the state of the U.S. economy. A weak and slow recovery mean the demand for loans, whether they be small business loans, credit cards, mortgages or auto-loans, is low. Meanwhile the looming and drawn out U.S. debt-ceiling debate is also affecting bank shares.
Wall Street big shots like JPMorgan's Jamie Dimon hav said a U.S. default would be catastrophic for the U.S. and the global economy. Speaking with journalists Thursday morning after releasing second quarter earnings, Dimon said: "No one can tell me with certainty that a U.S. default wouldn't cause catastrophe and wouldn't severely damage the U.S. or global economy."
JPM reported a healthy 2nd quarter last week raking in $5.4 billion in net income on $27.4 billion in revenue topping analysts’ estimates.
Across the pond banks are still grappling with the results of stress tests on European banks released Friday. Eight banks failed the test to measure how they would handle financial troubles. Barclays shares fell 8% today hovering around $13. That's the lowest price for the UK bank's shares since around April 2009.
European rival Lloyds and Royal bank of Scotland were also hammered with their shares down 8% and 6% respectively. Deutsche Bank shares were down 4% this afternoon with shares trading at $50.
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