Rosy results this week from a number of US banks offer more evidence that financial stocks are on the rebound – at least in the short term.
Citigroup yesterday reported its first profit in six quarters, posting a net profit of $1.6bn, compared with a net loss of $5.1bn last year. Earlier this week, JPMorgan Chase beat analysts’ forecasts with first-quarter profits of $2.1bn. This followed a comeback performance by Goldman Sachs, which reported net earnings of $1.81bn in the same three months and reports of a promising outlook from Wells Fargo, which later this month is to record first-quarter profits of $3bn.
Yet, a rather large cadre of fund managers are still sceptical that the rally will last.
“I’ve got to be honest. I don’t know whether this is the bottom or not and even if it is, I don’t think the recovery will be anywhere near as strong as it was after past downturns,” says Colin Morton, a fund manager with Rensburg Fund Management. “There are still lots of hurdles.”
One of these is the frenzied level of bond issuance, which hit a record high in the quarter, boosting the performance of Goldman and JPMorgan’s fixed-income groups, but is likely to peter out in the near-term.
The precipitous state of housing markets around the world is also a concern. Morton says the collapse of confidence in the US and UK property markets is one of the biggest problems for the US banks.
And while low interest rates helped banks’ “spread businesses” – which make money by borrowing at a low rate and lending at a high rate – in the first few months of the year, this trend is expected to reverse at some point in the coming months.
“We don’t think fixed income will be as significant as the year progresses,” points out Rob Burnett, a fund manager with Neptune. “We may well see more of the drip-drip from deteriorating loan quality. The easiest money is being made now and whether it can be sustained is unclear.”
Also, there are few signs that investors are expressing more confidence in the markets and banks still appear unwilling to lend with enthusiasm.
“From the general viewpoint of macroeconomics, I think we are in for the long haul here. This is a bathtub, or U-shaped, recession and I think we could bounce along the bottom for some time,” says Julian Chillingworth, chief investment officer at Rathbones. “Banks will have good quarters and less good quarters and I don’t think we can extrapolate and say things are going to get better if banks report decent performance in one quarter.”
Chillingworth splits financials into two groups: “strong favourites” such as JPMorgan Chase, which has seen its shares rise 32 per cent in the past month to more than $30, and Goldman Sachs; and the “walking wounded”.
This week, for example, UBS punctured optimism about a recovery in global banking stocks by unveiling an estimated loss of almost SFr2bn ($1.75bn) for the first quarter and a cull of an estimated 8,700 jobs from its workforce by 2010.
“Unfortunately, I am not able – as yet – to offer you any good news,” Oswald Grübel, the bank's chief executive, told shareholders at UBS’s annual meeting. “Instead, I am forced to present you with another round of unsatisfactory performance figures and to announce further drastic measures.”
But in spite of the dismal performance of some banks and predictions that the recession is unlikely to end in the near term, there is a bright spot.
While deleveraging in the markets is expected to continue as the financial crisis drags on, banks and other financial companies are poised to benefit more than other sectors when the flow of credit is restored. And even sceptics admit that the pace of earnings declines in the sector appears to be slowing.
More optimistic than some, Guy de Blonay, manager of New Star’s global financials fund, claims the rebound among some financials could be “the early stage in a rather real rally” and not just a “fake bounce”.
However, he believes this is still a bear market rally. “The S&P 500 index is at about 850. It went down to 660 and if it goes up to 1400, we’ll still be in a bear market,” he says.
