Analysts Generally Upbeat on Bank Stocks

Article excerpt

The predictability of trends shaping any stock is an educated guess at best. Even the experts don't always agree. Nonetheless, some financial services analysts and research directors were willing to share their observations on the issues that may impact bank stock performance in the first and second quarters of this year.

In recent months, much has been made of factors such as a slowing economy, credit deterioration, and the implication of Federal Reserve policies. In late January, Federal Reserve Board Chairman Alan Greenspan told Congress that the U.S. economy had slowed dramatically, signaling to many in press that further Fed interest rate reductions were on the way. (On Jan. 31, the Fed cut rates by another half a point.) While bank stocks typically act well in a falling rate environment because it is generally assumed lower rates are constructive for net interest margins, Keefe, Bruyette & Woods analyst David Winton states in a January research report that some regional banks that predominantly rely on traditional spread banking for earnings may still find a tough environment, given the yield curve. "Additional Federal Reserve rate cuts could very well expand net interest margins, but the increased reliance on higher cost borrowings to fund loan growth, in the absence of deposit growth, will partially mitigate the posit ive impact of rate cuts," Winton writes.

Just how specifically any of the above events may affect bank stocks in the near future is a matter of interpretation. Some experts are more bullish in the short term, while others are more tempered in their remarks.

"Choppy" was the adjective used by David Berry, director of research at New York-based KBW to describe the road ahead in the next few months, reflecting what he sees as a "tug of war between an accommodative Fed and moderately disappointing bank earnings." While Berry says that there has been a reluctance on the part of some analysts to assign "buy" recommendations, there are many investors who want to own bank stocks. "Over the past month, we've seen investors looking over the horizon at the anticipation of better times," Berry says. "Recent stock prices appear to be driven by the macro-call of individual investors."

Chris Mutascio, a vice-president with Legg Mason Wood Walker, says that while the fourth quarter of last year was "not as bad as some may have imagined it might be" in reference to credit concerns, many banks still face a challenging operating environment. One of those involves the economy and its impact not only on loan growth but asset quality. As several analysts note, however, perceptual influences also affect stock prices. The impact of actual performance results and economic scenarios may be overshadowed by the anticipation of things to come.

Nonetheless, Berry says there are "individual stories of excitement" and that KBW had several "buy" recommendations, as of late January. …