UnionBanCal Dances with Wall Street, Analysts

In what is apparently becoming the trend du jour this earnings season, San Francisco-based UnionBanCal Corp. (UB: 0.00 N/A) said Monday that profits fell amid fast-rising loan loss provisions, but that earnings nonetheless came in ahead of analyst estimates — and went so far as to sweeten the pot, as well, suggesting that third quarter earnings would top earlier estimates.

The move by the large California-centric regional bank appears awfully similar to the strategy employed with success by Wells Fargo & Co. (WFC: 27.87 -1.59%), which reported a drop in earnings due to increasing credit costs but beat analysts’ estimates — and the sweetened the pot by raising its dividend by 10 percent. Not to be outdone, Bank of America Corp. (BAC: 16.09 +0.06%), which also saw credit loss charges jump five-fold from year-ago levels and earnings drop accordingly, beat Street estimates and then sweetened the pot by suggesting that its acquisition of Countrywide would be accretive to earnings by the end of this year.

It’s proving to be an intoxicating mix for investors this Q2 earnings season thus far, because it suggests that the worst of the housing mess could be in the rear view. UnionBanCal proved no different: shares were trading at $49.41, up 8.59 percent, when this story was published.

The tale of the tape
Looking at the numbers, second-quarter profit at UnionBanCal declined 15 percent to $141.3 million, or $1.02 per diluted common share; this compared with $165.4 million, or $1.19 per diluted common share, a year earlier, and $108.6 million, or $0.79 per diluted common share, one quarter earlier.

The bank counted $14.2 billion in residential mortgages and $2.5 billion in construction loans among its $58 billion in total assets at the end of the second quarter.

Non-performing assets jumped by more than seven-fold from year-ago levels, reaching $225 million — and that Q2 NPA total also represented a 70.4 percent jump in NPAs from the first quarter alone. For those keeping score at home, that’s a pretty sudden and steep trajectory.

Against this total, in second quarter 2008, UnionBanCal’s total provision for credit losses was $100 million, up 25 percent from one quarter earlier. Loan loss reserves reached $527 million, net of charge-offs, as a result. Net loans charged-off for second quarter 2008 reached $31 million, or 0.28 percent of average total loans; compared to first quarter activity, charge-off velocity increased 158 percent within one quarter.

In other words, credit quality is clearly going to eat into the bank’s reserves as more loans continue to go south. But, to be fair, UnionBanCal isn’t expected to have to raise capital, either, given the existing cushion of reserves in place.

Investors clearly took heart in the better-than-expected results — but it was the bank’s suggestion that things will actually look better than expected when third quarter results are released that truly captured attention. From a California-based bank, too, no less.

UnionBanCal said it expects to record lower loss provision charges in the third quarter, between $65 and $85 million, meaning that earnings from continuing operations would be between $1.10 and $1.20 per share in the third quarter — the entire range would beat current analyst expectations, according to a Reuters report, which had pegged Q3 earnings at the bank at $1.01 for the upcoming quarter.

Disclosure: The author held no shares in UB, although indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.