Midwest Banks Show Move From Troubles

April 7, 2008
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GRAND RAPIDS — Analysts covering Midwest banks for Stifel Nicolaus have come to the conclusion that the lows for many — perhaps nearly all — Midwestern bank stocks are behind them. They warn, however, that there’s still more bad news ahead on the credit quality front, with losses likely to stay high for another couple of quarters.

In their report “A Shopping List of Midwestern Bank Values,” analysts Stephen Geyen and Ben Crabtree advise investors to brace themselves for some more bad news on the loan loss side, because nonperforming loans were up in the fourth quarter of 2007 and will likely be up again in the first and possibly second quarter of this year. Problems in the residential real estate market continue to take a toll on economic measures such as consumer spending and as the cash flow problems of commercial loan customers create increased risk within the commercial loan segment of bank loan portfolios.

“On the other hand, while we think that consumer spending will be constrained for some time by the unavailability of home equity funds (mortgage equity withdrawal), we also think there is a pretty good chance that a severe recession can be avoided and that the housing supply/demand situation can become significantly less worrisome, though not fully resolved, by late in the year,” Geyen and Crabtree wrote.

As far as housing supply/demand, the Federal Reserve has shown a willingness to use its arsenal of weapons to soften and even reverse the economic slowdown, the analysts pointed out, and Congress appears on track to provide a “stimulus/safety net” package that could limit further damage to the housing sector. 

Geyen and Crabtree anticipate that 2009 will be positive for Midwestern bank stocks.

“Even if we are currently in a recession, history tells us that it would likely be over by early 2009, and bank shares are good ‘early cycle’ stocks,” they noted.

“Even if the economic rebound falls short of being vigorous, as we now suspect, we should still see modest loan growth, credit costs rolling over, and a good probability of a positively sloped yield curve.”

The analysts said that all those factors add up to the prospect of potentially high single-digit earnings per share growth and more comfortable bank stock performance compared to the past year, particularly if bank merger and acquisition activity picks up, as Geyen and Crabtree expect it will.

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