You Can't Bank on Them Anymore despite Tuesday's Rally, Bank Stocks Remain Down
Byline: Christina Rexrode Associated Press
Even though financial stocks rose along with the market on Tuesday, the stock market declines of the last few weeks have been especially harsh on banking stocks.
The KBW bank index climbed 7 percent Tuesday to $39.58, following an 11 percent decline on Monday. A month ago it traded around $48.
Investors remain worried about regulatory probes, investor lawsuits and additional problems that could emerge as big banks continue to work through toxic mortgages and other remnants of the financial crisis.
When will financials recover? Analysts say that investors first need to get over the initial shock of the S&P's downgrade of U.S. debt on Friday, a development that rattled the broader market as well. Bank executives say the economy and housing prices must improve before their mortgage businesses can fully recover.
Investors need more certainty about when banks' mortgage problems might be over.
"People don't know what's going on," said Chris Whalen, co-founder and managing director at Institutional Risk Analytics, a bank rating agency and consulting firm.
Bank of America Corp. has been especially hard hit, in large part because of its $4 billion purchase of Countrywide Financial Corp., a lender known for exotic mortgages, in 2008. Countrywide's former executives later settled regulators' charges of insider trading and fraud. So far Bank of America has agreed to pay $12.7 billion to settle claims from investors who say they were misled into buying mortgage securities that were poor quality. The bank has set aside another $18 billion for potential claims roughly eight times what it made in 2009, its last profitable year.
Banks must also win back investors' trust, which means not making statements they can't live up to, said James Early, an analyst at The Motley Fool. One example he cited: Brian Moynihan's hints that Bank of America would raise its dividend this year, since the Federal Reserve already denied one request in March by the bank to do so.
Bank of America, the country's largest bank by assets, is perhaps the most vulnerable to the two biggest lingering mortgage problems:
investor claims and investigations by regulators. Claims from investors who say they were misled into buying bad mortgage-backed securities continue. Regulators continue to investigate paperwork problems on foreclosures.
Bank spokesman Jerry Dubrowski said Bank of America is "aggressively working on getting those challenges behind us as quickly as we can. …