S&P 500 Financial Index slipped below the important 165 support level. Markets were chopped down as German officials threw cold water on recent bailout plans. The officials said that the euphoria around an announcement on October 23 had gotten ahead of expectations and certain aspects of the plan still remain in question. In particular, the private rollout participation and the need for hair cuts on Greek debt. This has led to selling pressure in the group as is the norm on uncertainty.

Earnings has kicked off with banks falling short of expectations. Both JPM and C beat top and bottom line consensus but most analysts were quick to point out that the beats were helped by debt and credit valuations. WFC just flat out missed their expectations. Investment Banking remains an underperform as the tough Q3 capital market environment weigh on results. Underlying loan strength has been a positive for the banks but there is some concern over another uptick in mortgage delinquencies which is making investors nervous on top of European issues.

Upcoming earnings this quarter include: Tues: BAC, GS, STT... Wed: BL, BLK, CMA, MTG, NTRS, PNS, USB... Thu: BBT, FITB, KEY, COF... Fri: GE, STI.

News of Note

1) Citigroup (C) Earnings: Reports Q3 (Sep) earnings of $0.84 per share, excluding benefit from CVA of approx $0.39 per share which may not be comparable to the Capital IQ Consensus Estimate of $0.81; revenues rose 0.4% year/year to $20.83 bln vs the $19 bln consensus. Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi's credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011... reserve release of $1.4 bln; Securities and Banking was a drag as expected as it was down 12% y/y excluding the CVA impact. Credit continues to improve at the bank as total cost of credit during the quarter fell 43% to $3.4 billion. The improvement in credit costs was driven by a 41% decline in net credit losses to $4.5 billion and a $1.4 billion release of credit reserves, reflecting a lower level of inherent losses remaining in the portfolio... says it could see increasing losses in the first mortgage portfolio in Q4; pace of improvement in home equity delinquencies have slowed; expect operating expenses to be towards the lower end of previous guidance of $48-50 bln; reiterates that it plans on returning capital in 2012 and says that pace can increase in 2013... Has continued to reduce exposure to Greece; closely managing AFS exposure in GIIPS and France; have immaterial exposure to sovereigns. Total gross funded exposure to GIIPS is $20.6 bln; net current funded exposure is $7.1 bln; Sovereigns is $1.5 bln; Financial Institutions is $2.1 bln and COrporations is $4.1 bln... France/Belgium gross funded exposure is $14.4 bln; net current funded exposure is $2.0 bln; Sovereings is $0; Financials Institutions is $2.3 bln; Corporations ($0.2 bln).

2) Wells Fargo (WFC)- Reports Q3 (Sep) earnings of $0.72 per share, $0.01 worse than the Capital IQ Consensus Estimate of $0.73; revenues fell 6.0% year/year to $19.63 bln vs the $20.34 bln consensus. Capital increased with Tier 1 common equity reaching $91.9 billion under Basel I, or 9.35% of risk-weighted assets. Under current Basel III proposals, the Tier 1 common equity ratio was an estimated 7.41%. "The economic recovery has been more sluggish and uneven than anyone anticipated... Credit quality continued to improve in the third quarter, our seventh consecutive quarter of declining loan losses and the fourth consecutive quarter of lower nonperforming assets." Third quarter net charge-offs were $2.6 billion, or 1.37 percent (annualized) of average loans, down $227 million from second quarter net charge-offs of $2.8 billion (1.52 percent). Return on average assets of 1.26%... NIM did see a 17 bps decline q/q though. As with C, WFC had a reserve release of $800 mln, small but still important given the concerns over JPM mentioned above. And WFC stated, "Absent significant deterioration in the economy, we continue to expect future reserve releases". Says feels like capital markets have settled down but notes that can change and difficult to predict; Continues to expect funding costs to trend positively... deposits were the prime driver of lower NIM... Wells Fargo's total delinquency and foreclosure ratio for 3Q11 was 7.63%, down from a peak of 8.96% in 4Q09... Tier 1 equity under Basel III 7.41%... will continue to repurchase shares in Q4.

3) JPMorgan Chase (JPM) reports Sept card metrics: Co reports Sept U.S. net credit losses of 4.13% vs 4.67% in Aug (-54 bps m/m change); Sept 30+ day delinquencies of 2.53% vs 2.48% in Aug (5 bps m/m change)... Bank of America (BAC) reports Sept default amount net of recoveries of 5.99% vs 6.79% in Aug (-80 bps m/m change); reports Sept total Delinquencies of 3.99% vs 3.96% in Aug (3 bps m/m change)... Discover Financial Services (DFS) reports Sept Net Charge-Offs (NCO) of 3.17% vs 3.6% in Aug (-43 bps m/m change); total Delinquency rate of 2.5% vs 2.49% in Aug (1 bps m/m change).

4) First Horizon (FHN): Loan growth, NIM growth, and better asset quality, all at 75% of TBV - Wunderlich. Firm reits their Buy rating on shares of FHN, as well as their $13 tgt after the co reported its sixth straight quarterly operating profit in 3Q11, as nonrecurring restructuring items led to a modest shortfall versus consensus. Fundamentally, the firm likes what they see this quarter as loans, revenue, net interest margin and the TCE ratio all increased and asset quality improved. Firm says their $13 tgt reflects their expectation that FHN will continue to improve its bottom-line performance as it emerges from this credit cycle, and believe current levels offer an attractive entry point for patient investors.

S&P 500 Financial Index slipped below the important 165 support level. Markets were chopped down as German officials threw cold water on recent