Are Bank Earnings Really Better Than Expected?
Bank of America (BAC) announced a profit of 4.2 billion dollars for the 1st quarter which surpassed analysts expectations. Analysts expectations were for a profit in the millions but not the billions. This is the latest bank to report earnings that exceeded Wall Street’s low expectations. Wells Fargo, Citigroup, JPMorgan Chase and Goldman Sachs all had earnings that surprised Wall Street. These inflated earnings have not been based on increased revenue but on acquisitions, change in mark to market accounting rules and lower interest rates. The problem for banks is that loan losses continue to rise and credit markets continue to weaken. I still don’t believe that the bottom is in for all financial firms as charge offs and credit losses will continue to rise. Banks also will not have government aid in future quarters to help prop up earnings. It appears that banks will need to raise more capital to deal with loan losses in coming quarters. The easiest way for banks to raise capital is by selling additional shares. The negative to this is that this will dilute existing shareholders’ equity.
