Bank prices should rise this year

May 24, 2010
Text Size:

Volatile may be the operative word regarding the price of bank stocks for the remainder of the year. In general, though, those prices should rise as the year progresses — even as the category is coming off a large decline from several bad years in a row.

“The bank indexes — as well as a whole list of stocks, large, small and in-between — were down from late February of 2007 until the bottom, which was in early March of 2009. They were down 80 percent. It was a big change. And from that, we’re down now in the 45 to 50 percent range. So the good news is we’ve come back from the depths, as they say,” said Chris Marinac, managing principal and research analyst for FIG Partners LLC, which is based in Atlanta.

“But the flip side is we still have a lot of value to recover.”

Marinac isn’t suggesting that the remaining value will, or even should, be recaptured this year. In fact, he said it may take several quarters or several years for bank stocks to get back to square one.

“Banks are going to have to change, and we’re going to see, I think, a lot of that this year and also next. That’s going to include failures, which we’re very aware about, and consolidations, and then banks just doing things differently. And I think that a combination of all three of those will get the value back over time,” he said.

Some gains, however, should come this year because Marinac said bank stocks are still priced relatively inexpensively, even after an increase of about 18 percent during the first quarter that was followed by a small giveback in April. He said the outlook remains positive, based on how stocks have performed so far this year. Future performance, though, may be affected by an unrelated action like the alleged “flash crash” for a futures buy that sent the Dow into a 1,000-point freefall in just a half-hour.

“The problem is, what we’ve noticed is it changes so quickly,” he said of market activity in relation to a performance’s momentum. “And depending on what day it is, you can very well get lured into thinking things are better or worse than they are.”

Part of that big picture is keeping an eye on whether the federal government continues to help with liquidity, which Marinac said has created a steep yield curve that has allowed banks to make some money. Also important is whether the Federal Reserve keeps its lending rates to banks low.

“The banks right now are seeing a very, very strong flow of deposits, which is very, very helpful to these companies. But we’re also seeing a lot of folks sort of not being interested in typical money market funds, which are in the mutual fund industry, and that’s causing money to go back to banks, as well,” said Marinac.

“So it’s a very positive response in that regard, and I think that is certainly buttressing the financial system. Now, some of the things the government did on TARP were politically unpopular, but I think were necessary to kind of create the backstop, which was very helpful. Some of the programs to decrease deposit insurance were very smart and helpful,” he said, adding that an effort to insure payroll deposits wasn’t costly and proved to be a good safety net.

Marinac felt the number of bank closings this year would surpass the 140 that the Federal Deposit Insurance Corp. shut down last year. But he pointed out that closing a failing bank, which is a gut-wrenching and expensive experience for its shareholders, does help ease the investment anxiety for other investors. “It’s a necessary evil. We have to cleanse the financial system of the problem institutions,” he said. By mid-May, 72 banks were closed this year.

“We happen to think there is a silver lining in that. What we’re seeing is, when an institution closes, there is actually a return of deposits to the institution. There are folks who pull their money out of a bank, but when the new owner takes over, there is a perception that this bank is now safe. So we’re actually seeing funds come back in.”

Foreign investors recently began buying U.S. Treasury securities in light of the insecurity regarding the euro after the European community pledged $1 trillion in loans over the next few years to Greece and possibly Spain, Portugal and the tax-cutting nation of Ireland. These investors see the U.S. dollar as more stable, despite this country’s growing deficit, and some of their money could go into bank stocks this year. There is a precedent for doing this: Foreign investors found U.S. banks to be an attractive investment 20 years ago.

“We saw bank stock acting very strong towards the end of March and early April. We think that one of the factors — not the only factor, but one of the factors — driving that was there was foreign money coming into the market. Now was that directly because of Greece?” asked Marinac.

“We don’t know because there are folks who were saying we want to be in these markets with these banks because we know at the end of the day they’ll be buying real estate on the cheap, and that’s what banks do. Foreign investors were active in banking when banks were recapitalizing in the early 1990s. So from 1991 to 1993, there were a fair amount of investors who played in bank transactions.”

Many believe that most of the decline in stock prices that banks experienced the past few years was largely due to the subprime mortgage crisis and resulting collapse of the financial market, which led to the bailout. But Marinac said the value dropped for another reason, and he laid much of the responsibility for the lost value into the laps of the banks.

“A lot of it was the banks were just losing money. Because the banks were losing money, there were questions about how much capital banks had. Because of that question of capital, you really had investors having no confidence in anything in terms of a financial indicator. What was book value over earnings? What were the prospects going to be and the ability to pay dividends? All that was sort of blown out of the water, if you will. So that lack of confidence really took buyers for bank stocks completely to the sidelines,” he said

Marinac said as bank prices fell, the downward momentum that accompanied the falling prices made the prices fall even further, which created another downward momentum that brought prices down even more. That fall sort of fed off itself, as investors got out of the way.

“The collapse of the housing business certainly played a role, but a lot of it was so much more. It was a lack of confidence in financial statements, a lack of confidence in some of the survivability of the companies, and it was just an awful time. There’s no other way around it,” said Marinac.

“We are in an entirely better place than we were a year ago, back when the stress test results came out which began to ring the bell for capital raising. And we’ve seen a lot of capital raising done in banks, heretofore.”

Recent Articles by David Czurak

Editor's Picks

Comments powered by Disqus