Banks' crisis skills to be laid bare by results

By Jonathan Stempel

Analysts and investors are speculating how badly Citigroup Inc (C.N: Quote, Profile, Research), Bank of America Corp (BAC.N: Quote, Profile, Research), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) and smaller rivals may have gotten caught by a flight from risk that caused the value of billions of dollars of mortgages and loans to evaporate.

Hurt by write-downs and loan losses, many banks are expected to post lower earnings than in the second quarter. The question is how long their hangover from the end of the housing and merger booms will last.

"Generally, the view is banks will use the third quarter to build reserves or take losses stemming from liquidity issues," said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. "The market will overlook what is reported in the third quarter as it looks toward improving conditions in 2008."

Investors will also weigh whether depressed share prices already reflect expected bad news, or may fall further. They want banks to be up front about problems, and show their ills will not endure.

"Transparency will be huge," said Richard Moroney, chief investment officer at Horizon Investment Services LLC in Hammond, Indiana. "Investors want clarity that banks have a handle on the credit crunch. Banks that are straightforward will be received more favorably."

WRITE-DOWNS

Recent results at Bear Stearns Cos (BSC.N: Quote, Profile, Research), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) were driven heavily by write-downs for riskier mortgages and leveraged loans that investors avoided.

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