Analysts Predicting Earnings Surge for Big Banks in 2012; Overly Optimistic?

[Stocks-to-Watch]

Barclays analyst Jason Goldberg released his 2012 bank outlook yesterday, and one quote in particular stood out: “At current valuations, we believe the risk of not owning U.S. bank stocks is greater than owning them,” he wrote. It’s the kind of quote that people will look back on in 12 months and either nod appreciatively or laugh uproariously in that way that they do when anyone mentions Meredith Whitney and her doomsday prediction for the municipal debt market.

Analysts overestimated the strength of the big banks in 2011 — they predicted a 32% increase, but the banks ended up falling far short (Bloomberg extrapolates an 18% decline using fourth quarter predictions). In 2012,* analysts surveyed by Bloomberg expect the six biggest lenders to grow earnings by 57%. That growth should come from more investment banking deals, better trading results and cost-cutting.

The headwinds facing the banks are legion, and their impacts are mostly unknowable — litigation risks hang over Bank of America (BAC) and Citigroup’s (C) results depend heavily on the global economy. And incremental cost-cutting and loan growth at the banks certainly won’t counteract the fallout from a default in Spain, for instance.

But clearly trading and banking opportunities are providing some optimism. The two banks expected to post the biggest earnings growth are Morgan Stanley (MS) and Goldman Sachs (GS), both of which have historically depended on those areas for the lion’s share of their profits.



Original Article Source by Barrons.com