How bad is the future for banks?
TEXT OF STORY
Kai Ryssdale: I asked Ms. Petrou about other banks and the rest of the financial sector because banks earnings start coming out this week. But Wall Street wasn’t waiting around for the actual bad news to hit. Cleveland-based National City dropped 15 percent today. Trading was stopped at one point. Washington Mutual traded down more than 30 percent, enough so that the bank was forced to make an announcement after the bell that it’s got plenty of money in the bank to meet its obligations. Nobody expected bank profits to be especially good, but are they really going to be that bad? We asked Marketplace’s Alisa Roth to find out.
Alisa Roth: The funny part is, the only real surprise there could be in banks’ second quarter earnings is if they turned out to be really good. Sean Ryan is an analyst with Sterne Agee.
Sean Ryan: Everybody’s assuming that actual reported earnings per share will be weak but nobody really cares. All that anybody really cares about looking at in these earnings reports is indicators of credit quality and indicators of capital adequacy.
He says the problem is banks have been in a vicious cycle for the last couple of months. They need to raise capital, so they sell more stock, which dilutes the share price and pushes the stock even lower. He expects some banks will go under, the way IndyMac did last week. He says those failures could happen through the end of this year and even into next. Gerard Cassidy is an equity analyst at RBC Capital Markets. He says banks and their shareholders are definitely in for a rough ride.
Gerard Cassidy: It is going to be painful, which is what is happening on days like today. It’s going to take time and it’s going to take perseverance. But in the long run, the system is resilient and the system will get through this.
But Cassidy says that even banks that manage to make it through this round, may not survive. He expects a lot of them to get bought up.
Cassidy: Once investors and bank managements have a good feel that the worst is over on the credit front, we anticipate there will be a number of transactions done.
Cassidy says that consolidation probably won’t start until 2010 or 2011. In the meantime, he expects bank earnings to be down as much as 35 percent.
In New York, I’m Alisa Roth for Marketplace.
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