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There's a hidden way to get detailed financial data on publicly traded U.S. banks days before the companies release their earnings. The information is accurate, free and – most important – totally legal.
The source is the federal government, which publishes snapshots of banks' financial pictures, known as call reports, on a hard-to-find website. Banks, sometimes days later, distribute similar information in earnings releases that are followed closely by investors, analysts and the media. On those occasions when call reports are published before earnings, savvy stock-pickers can glean useful information before other investors.
"This is a very unusual way to release earnings information," said Jeffrey Burks, a University of Notre Dame accounting professor who co-wrote a study on the practice. "You have a regulatory agency quietly putting it up on their website with no advance warning."
Most of the potentially market-moving information pertains to small and medium-sized banks. Larger firms such as Citigroup Inc. and JPMorgan Chase & Co. typically report earnings well before call reports are released. Still, the early release represents a rare discrepancy in a financial-reporting system that's supposed to provide all investors with the same information at the same time.
The gap exists because U.S. bank regulators tried to make data available to the public more quickly by setting up an online repository for the information in 2005. But few people know they can get that data before earnings reports by checking an obscure website run by a consortium of agencies that regulate banks and credit unions.
In one example cited by Prof. Burks, who authored the study with fellow Notre Dame professors Brad Badertscher and Peter Easton, investors who noticed a 2012 call report on BOK Financial Corp. would have been able to determine that its banking unit had $60.4-million (U.S.) of profit in the fourth quarter, indicating the company would fall short of the $75.2-million that analysts expected for the entire firm.
The Tulsa, Okla.-based firm's stock price dropped slightly between the Jan. 30, 2012, call report and the Feb. 1 earnings release, though trading volumes remained average. When the earnings report came out – with earnings per share at $0.98 instead of the $1.10 consensus estimate – the stock's slide accelerated, losing 4.3 per cent that day.
A sophisticated investor who saw the call report and decided to short-sell BOK's shares would have made money. In a short sale, an investor borrows stock from a third party, betting that the price will fall, and pockets the difference if it does.
Spokesmen from the three agencies responsible for the call reports – the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency – declined to comment.
Getting the call reports before earnings can be an advantage even though they provide raw data without any commentary from the bank, said Matt Olney, who covers BOK and other banks in the Southwest United States as managing director of Stephens Inc., a Little Rock, Ark.-based investment manager.
If a decline in a bank's credit quality is evident, that would probably be "a very telling sign," said Mr. Olney, who uses the reports in his coverage.
From January, 2012, to March, 2014, call reports were published ahead of earnings reports for banks including CIT Group Inc.; First Citizens BancShares Inc.; a bank unit of Franklin Resources Inc.; and a bank then owned by insurer MetLife Inc., according to the Notre Dame study. When call reports were issued in advance, a stock's price volatility was higher than usual, the study showed.