Oppenheimer banking analyst Chris Kotowski says banks are going to flush a ton of crap off their balance sheets in Q4. This will make asset trends look temporarily bad–get ready for big write-offs–but it will also clear the decks for a much better 2010.
To this we would add that Bank of America will likely be even more aggressive about this than your average bank.
The CEO switch gives new CEO Brian Moynihan a chance to clean the books and blame Ken Lewis for all the garbage. The more Moyhihan rinses out now, the less he’ll have to answer for later. So expect a veritable Augean Stables move from Bank of America.
We have been saying since our 3Q09 preview that we expect 4Q09 to be a clean-up quarter. We mean this not just in the sense of special charges that impact earnings, of which there will be plenty, but also in the sense that in order to get as much “reserve building” out of the way in 2009 as possible the companies will be very aggressive in classifying problem assets and this will likely make asset quality trends look poor. To this mix we now add reduced loan volume expectations for 2010 and a more pronounced than normal seasonal slowdown in trading.
We are trimming our 2010 estimates almost across the board with only Lazard untouched. At the investment banks the trims are fairly modest and driven mainly by the fact that our 2010 trading estimates were derived off full-year 2009 estimates, and with these somewhat diminished it has a modest pull-through effect on 2010. We are also trimming our price targets based on our reduced estimates. At the commercial banks, our estimate revisions are being driven by lower loan volume assumptions (which drove a roughly 3% reduction in our pre-provision earnings estimates) and the assumption that loan losses will remain at their peak 4Q09 levels for two quarters rather than one. This latter change stemmed from sloppy November master trust data. We view the 4Q09 slowdown in trading as seasonal and believe it has negligible implications for the underlying health of trading businesses, which we consider quite strong. In this report we take an extensive look at long-term trends in the business, which indicate that 2009 results are not far off trendline. We continue to believe that investment banking and trading businesses are likely to do well in 2010. M&A is just beginning to rebound, enormous financing needs remain, and concern about the sustainability of trading profits (which is reflected more in the single-digit P/E multiples than in earnings estimates) is overdone. Loan volume and NPA inflow trends will be poor for several more quarters, but historically such times have been good for bank stocks.
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