ALL BUSINESS: Accounting Tricks Boost Bank Profits

There's nothing like a little magical math to make banks' financial woes go away.

FILE - In this April 9, 2009 file photo, the headquarters of Wells Fargo & Co., in San Francisco is...

FILE - In this April 9, 2009 file photo, the headquarters of Wells Fargo & Co., in San Francisco is shown. Results of the government's stress tests of financial companies with at least $100 billion in assets are expected Thursday, May 7, 2009, after the markets close. (AP Photo/Eric Risberg, file)

(AP)

Bank stocks have surged in recent weeks, a sign that investors are betting the worst of the financial crisis is over. But in reaching this conclusion, the market has chosen to ignore some creative accounting banks are using to bolster their finances.

Lots of fuzzy math was trotted out during the just-ending earnings season to goose profits or narrow losses, and it will show up again as banks look to shore up their capital to meet requirements under the government's "stress tests." The tactics are perfectly legal, but they make the banks look healthier than they really are.

"Investors who have been pleasantly surprised by the recent results could find themselves equally bothered later on when they discover plenty of unpleasant things," said Martin Weiss, who runs the investment firm Weiss Research Inc.

After a year and a half of frightful declines, the Standard & Poor's Financials Index of 80 banks, insurers and investment firms bottomed in early March and has since more than doubled from a 17-year low, according to S&P.

Momentum behind the rally grew in April as large banks began reporting mostly better-than-expected first-quarter results. Earnings for the companies in the S&P Financial Index have come in nearly 11 percent ahead of analysts' estimates.

That could just be the start of turnaround for the banks, said Kent Engelke, chief economic strategist at Capitol Securities Management in Glen Allen, Va. He thinks there is a 25 percent probability that there will be positive economic growth by the end of the second quarter, which will benefit banks' loan portfolios.

"In order to have a healthy economy, we need a healthy banking system," said Engelke, whose investment firm owns bank stocks. "I believe the government will do anything to ensure that will happen."

But the recent strength seen in bank earnings didn't come from significant improvements in their core businesses. Instead, accounting maneuvers helped bolster bottom lines.