Stocks soar as world’s central banks move to support big banks just hours after S&P downgraded them

Put that in your new ratings model and smoke it, Standard & Poor’s.

Hours after Standard & Poor’s downgraded 16 of the world’s biggest banks—largely because the company’s new model for awarding credit ratings decided that governments were less likely to support their big banks—six of the world’s central banks, led by the U.S. Federal Reserve, came to the support of the world’s big banks.

In a coordinated move the central banks lowered the cost of emergency dollar funding by 0.5 percentage points. By lowering the cost of dollar funding from the central banks, the move will make it easier for stressed European banks to fund their dollar-denominated activities. The cost to European banks to fund in dollars had climbed to the highest level in three years.

On the news of the central bank move, the German DAX Index was up 4.9%, and the U.S. Dow Industrial Average had climbed by 3.7% and the Standard & Poor’s 500 by 3.6% as of 11:45 a.m. New York time.

Shares of the banks that S&P downgraded yesterday are performing even better. Read more

Euro banks opt to cut lending rather than raise capital–that can’t be good for growth

So much for the grand plan to buttress the strength of European banks by requiring them to raise $150 billion in additional capital.

In the days since the European Banking Authority announced that goal and spelled out which banks would need to raise how much, Europe’s banks have pushed back with their own plans to meet the new 9% capital ratio.

And to no one’s real surprise, the banks are opting to sell assets and shrink loan portfolios rather than try to raise capital in financial markets that have marked European bank stocks down, in many cases, below their book value. And banks look like they will do everything possible to avoid having to take government funds that would give politicians a say on dividend and bonus payments.

The latest estimate from Morgan Stanley is that of Europe’s 28 biggest lenders only eight will raise capital. And that the total additional capital raised will add up to just $15 billion instead of the $150 billion figure from the European Banking Authority.

I can see two effects of the banks’ decision—both negative. Read more

Update U.S. Bancorp (USB)

This is about as good as it gets in U.S. banking these days. Which is to say not great. But U.S. Bancorp continues to show that it’s more than ready to take advantage of the turn when it comes.

On October 19, before the New York market opened, U.S. Bancorp (USB) reported third quarter earnings of 64 cents a share. That was 2 cents a share above the Wall Street consensus.

Revenue grew by 4.5% from the third quarter of 2010 and, unlike the big New York banks, U.S. Bancorp also showed sequential revenue growth as well with revenue up 2.2% from the second quarter of 2011. Revenue of $4.8 billon was comfortably above the $4.71 billion expected by Wall Street.

The fundamentals of the bank’s business remained very solid. Read more

Just shows you should never believe the headlines when it comes to quarterly earnings—especially for banks right now.

According to the headline numbers, third quarter earnings at Citigroup (C) climbed by 74% to $3.8 billion. The headline number put Citigroup’s earnings per share at a huge $1.23. So according to the headlines, Citigroup killed this quarter since Wall Street had been projecting that the bank would earn just 82 cents a share for the period.

Just one tiny problem—the headlines are misleading big time. $1.9 billion of the bank’s $3.8 billion in earnings this quarter are due to a very quirky accounting gain. I say quirky because the $1.9 billion is the result of a decline in the bank’s credit quality. When a bank’s credit quality declines, accounting rules say the bank should revalue the debt that it owes its creditors. The theory is that debt is now worth less because the bank’s creditors think there’s a greater chance that the bank will default. The effect is that as a bank’s credit rating–as expressed in the market for credit default swaps—drops, the bank gets to record a big accounting gain on its debt. That’s where $1.9 billion in Citigroup’s earnings came from this quarter.

Of course that $1.9 billion gain is all on paper. Read more

You’ve got to have a really long-term view to love any bank stock now–even one as strong as JPMorgan Chase

The market isn’t going to cut even the strongest banks any slack—or look beyond the current quarter.

That’s the message in the market’s reaction to JPMorgan Chase’s (JPM) third quarter earnings report released before the New York market opened. The bank reported better than expected earnings—on a one-time accounting adjustment–but said revenue grew by just 0.1% from the third quarter of 2010.

As of 2 p.m. New York time JPMorgan Chase shares were down 5.4%.

If you’ve got a perspective of more than a quarter or two the size of that drop is surprising. The bank reported a 30% jump in deposits and said, basically, that it was swimming in liquidity. Not a bad thing to have going for you when most of the world’s banks are scrambling for capital. JPMorgan Chase is clearly, in the long run, one of the world’s strongest banks and it should be able to use that strength to pick up business from competitors.

No one, I’d say, is willing to look that far ahead.

Of course, the current quarter had its share of worries besides the tiny gain in revenue. The bank booked a big $1.9 billion pre-tax gain in the quarter that added 29 cents to the company’s earnings in the period. Taking out that one-time gain—and one-time losses in the private equity unit and for additional litigation expense—wipes out 5 cents per share of the company’s earnings. Instead of beating by a very impressive 8 cents a share, the bank exceeded Wall Street’s earnings projections by a much more modest 3 cents a share.

Which sounds pretty good until you notice that my adjusted earnings of 97 cents a share is a big 23.6% lower than last quarter’s earnings of $1.27 a share.

All the evidence is that the banking business just isn’t growing right now.

For example, JPMorgan Chase showed a 13% drop in investment-banking revenue from the second quarter. And the damage was spread across this unit. Investment banking fees fell 31%. Revenue from fixed income markets fell 14% (after you subtract accounting events). Equity underwriting fees dropped 47%.

And profitability is certainly a question. The bank’s return on equity fell to 9% in the quarter from 10% in the third quarter of 2010 and from 12% in the second quarter of 2011.

Which isn’t to say there wasn’t any good news in the quarter. Read more