It’s that time again - the carnival that is US earnings seasons. The big financial companies start reporting next week - Bank of America kicks it off on Tuesday 20th - but analysts are still tweaking their spreadsheets and sharpening their knives - er, revising their calls.
Take Citigroup’s Keith Horowitz, who knocked 11 per cent off Bank of America’s shares with his forecast of a $3.6bn fourth-quarter loss (or 75 cents a share), a mark to market loss of $3bn, and a dividend cut to 5 cents a share from 32 cents.
Previously, Horowitz was expecting a profit of 2 cents a share, while the consensus is for a Q4 profit of 21 cents a share.
But here’s the kicker (emphasis ours):
With $55 bil of charges taken so far, we estimate Bank of America is 33% through the cycle. By looking at cumulative losses and comparing them to charges taken, we can estimate how far along we are into this cycle. Based on our estimates, BAC has $165 billion of embedded credit losses on its balance sheet, of which it has taken about 33% of the hit either through the loan loss provision or the purchase accounting marks related to CFC.
Horowitz maintains the stock has “excellent long term value” and does not foresee any further capital raising at BAC for the next two to five years.
Still, there’s a bit of pots and kettles here. As Reuters noted, Horowitz’s call comes amid speculation of that Citigroup might itself face a significant loss operating in Q4 - some $10bn. Or it might not, if this Bloomberg report is to be believed:
Citigroup Inc. may book a gain of as much as $10 billion by selling control of its brokerage to Morgan Stanley, a person familiar with the talks said.
The pretax gain would come from writing up the value of Smith Barney to a new price set by the deal, said the person, who declined to be identified because the talks are confidential. The gain of $5 billion to $6 billion after taxes would flow into Citigroup’s capital — a cushion against loan losses that got so eroded that the New York-based bank had to get $45 billion of rescue funds last year from the U.S. government.
Citi is due to report on Jan 22. Shares were off more than 19 per cent in late trade - suggesting the market’s expecting a bigger loss than would be helped by any M&A “synergies”.
