JPMorgan Chase & Company’s (JPM) first quarter earnings came in at 74 cents per share. That was substantially ahead of the Consensus Estimate from Zacks Investment Research of 63 cents per share.
Bank of America Corp. (BAC) reported earnings of 28 cents a share, beating Wall Street estimates for a profit of 9 cents a share according to Thomson Reuters.
This is leading many analysts to expect more of the same when Citigroup (C) and Wells Fargo (WFC) release their first-quarter earnings reports next week.
A recent analysis from Garett Jones of George Mason University and Rebel A. Cole of DePaul University took into account some economic realities not known by U.S. regulators who conducted the stress tests last year. These included:
• A 9.7% unemployment rate
• More than 10 million discouraged and underemployed workers
• 15% combined delinquency and foreclosure rates on residential mortgages
• The continuing deterioration of the commercial real estate market.
The analysis showed that together, Bank of America, Citibank, JP Morgan and Wells Fargo. hold $408 billion in tangible common equity and an additional $129 billion in allowances for loan losses. In their loan portfolios, they hold $445 billion in home-equity loans, $136 billion in pay-option adjustable rate mortgages and $44 billion in construction loans.
Using mark-to-market accounting, three of the four have loan portfolios that would be deemed insolvent, leading to the concern that these four banks, as well as most other lenders, will lose much, much more on mortgage-related loans than rosy-eyed regulators or the banks are publicly acknowledging.
And Bloomberg recently reported on a new piece of research by the independent group CreditSights that estimates that Bank of America, JPMorgan Chase, and Wells Fargo may have to set aside an additional $30 billion to cover losses on home equity loans.
Those three banks, plus Citigroup (NYSE: C), hold roughly 42% of the total U.S. second-lien mortgage loans.
Many of these second-lien loans are backed by underwater real estate, yet have been kept on bank balance sheets at full value because borrowers have kept current on their payments.
CreditSights estimated that the banks could see a 40% hit to loans on underwater property. For JPMorgan and Bank of America, the total hit could be nearly as much as expected 2010 earnings, while for Wells Fargo the total may be higher than 2010 earnings estimates.
And all of that is based on how much you believe in the estimates. Most major Wall Street banks have engaged in, opaque reporting practices including a recent report of drastically lowering debt levels at the end of the quarter, which means that even these estimates could be too optimistic.
One thing is certain, the housing market and the banking industry are two issues that are tightly intertwined and the speculation about both is likely to continue for some time.
