Fifth Third (FITB) and Huntington (HBAN) were crushed today after reporting huge losses. Fifth Third tried to reassure investors by noting the writeoffs were “goodwill”, non-cash writeoffs. Keycorp (KEY) did the same.
We will take a look at goodwill in just a bit, but first let’s review the story: Fifth Third, Huntington shares slip 30% on dividend cuts, rising charges
Shares of Firth Third Bancorp and Huntington Bancshares were down more than 30% in afternoon trading Thursday as investors reacted to more dismal quarterly results from banks.
Fifth Third said it swung to a fourth-quarter net loss of $2.18 billion, or $3.82 a share from a profit of $16 million, or 3 cents a share, a year earlier. Wall Street analysts had been looking for a profit of 2 cents a share, according to a survey by FactSet Research.
The result was affected by a $965 million goodwill impairment charge, as well as losses on loans transferred to its held-for-sale book of $800 million and provisions for loan losses of $729 million.
During the quarter, Cincinnati-based Fifth Third sold $3.4 billion in preferred shares to the Treasury Department under the capital purchase program designed to give financial assistance to banks. The company slashed its quarterly dividend last month to a penny a share in order to conserve capital.
“Economic conditions have deteriorated across our footprint and have placed both our consumer and commercial loan portfolios under significant stress, as evident in our bottom-line results for the year,” Chief Executive Kevin Kabat said in a prepared statement.
Fifth Third Bancorp has been dinged by its exposure to real estate loans in states such as Florida, Michigan where markets have been hit particularly hard.
Also Thursday, Huntington Bancshares of Columbus, Ohio, said its fourth-quarter loss widened to $440.4 million, or $1.20 a share, compared to a loss of $239.3 million, or 65 cents a share, in the year-earlier period.
The consensus analyst estimate was a profit of 20 cents a share, according to FactSet.
Huntington, which has received $1.4 billion from the Treasury, cut its quarterly dividend to a penny a share. Top executives are skipping 2008 bonuses, while compensation for the board of directors will only be in common stock going forward, the company said.
KeyCorp which has received a $2.5 billion infusion from the Treasury, reported Thursday it suffered a fourth-quarter loss amid lingering credit woes. The Cleveland-based bank swung to a net loss of $554 million, or $1.13 a share. Last year, the firm reported a fourth-quarter profit of $25 million, or 6 cents a share. Analysts had forecast a loss of 2 cents a share for the period.
The loss was mostly due to a non-cash accounting charge for goodwill impairment and continued building of loan loss reserves “in light of the challenging economic environment,” the firm said.
It recorded an after-tax non-cash accounting charge of $420 million and took a $594 million provision for loan losses, up from $363 million at the same point a year ago.
KeyCorp said it was cutting its dividend by about two-thirds.
Balance Sheet Is The Future
Inquiring minds are reading Deflation Accounting Signals Bleak Future for clues as to why these goodwill charges are important.
In September 2007, I wrote: “[For financial services firms], the income statement is the past; the balance sheet is the future.” Had I thought more about it, I would’ve said that was now true for every company.
Since I wrote that note, we’ve seen companies of all kinds writing off assets left and right. In many cases, these corporations try to position asset write-offs as “non-cash.” And while technically correct, I would again remind readers that the reason the charges are “non-cash” is that the money (or stock) went out the door long ago. And to suggest that these write-downs aren’t important is like suggesting that bank-loan losses (also non-cash charges) don’t matter.
Asset write-downs do matter – whether they’re banks’ loan assets, manufacturers’ inventory, media companies’ goodwill, or government agencies’ deferred tax assets. At their core, outside of cash, balance-sheet assets are a forward-looking promise of cash “value” to be received at some time in the future.
So when assets are written down, a corporation or bank is sending a clear message that the future — particularly future cash flow — isn’t as bright as it once was.
Recently, this thought has had me rethinking the reason the “future” on corporate balance sheets was so rosy – how it was that balance sheets could balloon with more and more forward-looking assets? Obviously a lot of the balance-sheet growth reflected a willingness on the part of manufacturers of all kinds to accept installment notes in lieu of cash – but there’s also been a staggering amount of growth in goodwill, intangibles and a whole host of “other assets.” Why?
While I won’t bore you with the twists and turns of my thinking, where I ended up was simply, at all places, inflation. That, thanks to the basic, historic, economic notion that prices only go up over time, asset values have a floor. And therefore, because of our “inflation bias,” we should be willing to recognize more and more of these “promises” on corporation and bank-balance sheets.
But if our inflation bias is truly what has supported the floor for all of our forward-looking assets — again, everything on the left side of the balance sheet, less cash — then what happens when deflation hits?
I don’t know where our current deflationary cycle ultimately takes us, but I hope that this helps to better explain how balance sheets reporting hundreds of billions of dollars in assets one day, can show 0 the next. And, more importantly, why — during periods of deflation — all balance-sheet assets (other than cash) are of questionable value.
Ultimately, I wonder whether, like the rating agencies, our accounting firms will become yet another scapegoat for our current crisis: That they too, should’ve recognized the “inflation bias” inherent in balance sheets and some how prevented it from happening; that maybe “cash accounting” should’ve been used, particularly in a world filled with derivatives and off-balance-sheet vehicles.
But to end where I began: “Earnings are the past; the balance sheet is the future.” And with deflation, that future isn’t very bright.
Inquiring minds may wish to read Bank Earnings 102: The Best of Times, The Worst of Times when Minyan Peter, former treasurer for a large Midwest bank, first penned “The income statement is the past. The balance sheet is the future.“
Minyan Peter is always a great read.
Mike “Mish” Shedlock
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