More Skeletons in the Closet for U.S. Banks

It looks like Friday the 13th came a little late for the financial district since there were two skeletons that came out of the closets for U.S. banks today.

First, just a few days after Citigroup‘s (C) mixed second-quarter earnings announcement, Bank of America Corp. (BAC) also revealed both good and bad news for its latest earnings announcement.

On the one hand, the company finally swung to a profit, topping the consensus earnings estimate by over 35%. Sales also advanced 65% to $21.97 billion. However, there was a dark cloud that overshadowed much of this good news, and that is the fact that Bank of America has a whopping $22.7 billion in mortgage claims. This represents nearly a four-fold surge in the past four months, and the firm has only added $395 million in reserves to cover any claim payments.

This is a prime example of the types of pitfalls that await the unwary investor, and it looks like Bank of America is going to have these claims and any settlement proceedings hanging over its head for some time.

The second shocking announcement came today from Capital One Financial Corp. (COF), which has been ordered to pay $210 million in refunds and regulatory fines due to questionable marketing tactics. Representatives at Capital One Bank allegedly tricked over 2.5 million credit card holders into purchasing unnecessary and expensive services including payment protection and credit monitoring. A consumer protection watchdog discovered this activity and ordered Capital One to return $150 million to customers and $60 million to various regulatory agencies. Capital One’s profits are already expected to sag over 3% this year, and this charge will undoubtedly hit the company’s bottom line even more.

In the case of banks, there is usually a gray cloud behind every silver lining, and I recommend that you stay far away from this sector.  As tempting as this year’s double-digit capital appreciation may seem, there are simply too many risks attached to these companies.

Tomorrow, we’re going to be hit by a wave of other high-profile earnings announcements—including tech giants Google Inc. (GOOG) and Microsoft Inc. (MSFT) as well as a few big food plays like Dole Food Company Inc. (D) Safeway Inc. (SWY) and Chipotle Mexican Grill Inc. (CMG).

Until next time,

Louis Navellier

Louis Navellier

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