U.S. bank earnings may be pressured by weak loan market: analysts

Fri Nov 20, 2015 5:20pm EST
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By Dan Freed

(Reuters) - The falling value of loans to junk-rated companies could be a negative factor in fourth-quarter earnings for U.S. banks, analysts said.

"We know the trouble's there but I think a tougher credit market is kind of factored in to a lot of the thinking," said Sandler O'Neill analyst Jeff Harte.

Analysts cautioned that any losses at this stage seem relatively small, and could be offset by gains in other parts of banks' bond trading businesses, such as Treasuries trading.

Banks could also have hedges that reduce the impact of any losses from individual deals, they added. Specific, accurate estimates are hard to make, they said. Analysts have not been reducing bank earnings estimates in recent weeks as parts of the loan market have sputtered.

Underwriters led by Bank of America (BAC.N: Quote) and Morgan Stanley (MS.N: Quote) ended up postponing a $1.5 billion and a 760 million euro loan package to help finance Carlyle Group's leveraged buyout of Veritas, a data storage business.

A $1.5 billion loan backing the acquisition of fashion department store operator Belk Inc by private equity firm Sycamore Partners also saw weak investor demand. The lending syndicate behind the loan, led by Morgan Stanley, sold it at a lower price than anticipated. Morgan Stanley and Bank of America declined comment.

Analysts on average forecast Morgan Stanley will earn 54 cents per share in the fourth quarter, excluding special items, according to Reuters Estimates, up from 39 cents a share in the same quarter a year earlier.

Sandler O'Neill's Harte said that if the Federal Reserve raises interest rates in December, interest-rate products like Treasuries should trade more actively, helping offset any losses in credit products including leveraged loans. If the Fed effect is weaker than expected, fixed income trading revenue could fall roughly 15 percent versus the third quarter, Harte said.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in the Manhattan borough of New York City, January 20, 2015.  REUTERS/Mike Segar