Bank Stocks: Fear Trumps Fundamentals
Investors interested in buying and selling U.S. bank stocks based on the performance of the underlying businesses might well have gone on holiday this week -- and might stay there next week.
The stocks swung wildly this week. For two days, they headed south amid disappointment that quarterly results from banks such as Buffalo, New York's M&T Bank and U.S. Bancorp reflected rising loan losses.
Then on Wednesday, the sector powered higher as the larger lenders Wells Fargo, JPMorganChase and Citigroup reported results that were much better -- or less bad -- than feared. The 24-member KBW Bank Index soared 28 percent on Wednesday and Thursday alone.
"Fundamentals are being ignored," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. "Having said that, the fundamentals we're looking at are dated. They reflect the second quarter, which is history, and the stock market is a forward-looking mechanism."
Some of the gains may have been attributable to falling oil prices and regulators' crackdown on short-selling investors who try to push bank shares lower.
But investors remain on edge, making it difficult to place big bets ahead of results expected next week from lenders such as Bank of America, Wachovia, Washington Mutual and National City.
Market illiquidity, meanwhile, has left banks with too many assets that have no buyers, or which are hard to value.
"Valuation is not a good measure of what to buy or when to buy, because we don't know what we're valuing," Ghriskey said. "There is so much confusion."
All Clear? Not Yet
Before Wednesday, the KBW index had fallen 45 percent this year, and 60 percent from its February 2007 peak, as the industry struggled with losses from complex debt and mortgages.
This has resulted in more than $400 billion of write-downs and credit losses, in excess of $120 billion of capital raises, and a slew of dividend cuts. More of each is expected.
Compounding the troubles was regulators' seizure last week of IndyMac, the nation's biggest banking failure since the 1980s. Several lenders issued statements to dampen speculation that they could be next.
Wells Fargo's results , released Wednesday, eased fears. While profit fell 23 percent, they appeared strong given the fifth-largest bank's decision to set aside a healthy $3 billion for credit losses.
The KBW index rose 17.3 percent that day, the largest one-day gain since the index began tracking stocks in May 1992.
Wells Fargo's own shares rose 33 percent.
On Thursday, the index rose another 9.4 percent after JPMorgan Chase , the third-largest bank by assets, said profit fell 53 percent -- again, better than expected.
And on Friday, Citigroup shares rose above $20 for the first time in a month after the largest bank by assets posted a smaller-than-expected $2.5 billion loss. The shares had bottomed Tuesday at $14.01. (Should Citi be broken up? See video)
"Financials are alive and kicking," said Matt McCormick, an analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "In a secular bear market, I am not ready to ring the 'all clear' bell; but usually when you emerge, it's a gradual climb."
Indeed, Citigroup Chief Financial Officer Gary Crittenden on Friday said deteriorating consumer credit will have a "meaningful" impact on results for the rest of 2008.
And JPMorgan Chief Executive Jamie Dimon on Thursday said credit losses on the safest, prime mortgages could triple from current levels -- "for a while, not forever," he said.
Investors have plenty of uncertainties ahead. Analysts expect Bank of America on Monday to say quarterly profit fell 60 percent to about $2.3 billion. But the focus may be more on what the largest U.S. retail bank is finding at the former Countrywide Financial , the struggling giant mortgage lender that Bank of America bought on July 1.
Wachovia , the fourth-largest bank, is expected Tuesday to report a quarterly loss of as much as $2.8 billion. The bigger story may be how new Chief Executive Robert Steel fulfills his stated intent to slash costs, unload weak assets and preserve capital. Some analysts say another dividend cut may be needed.
And while analysts on average expect Washington Mutual to lose more than $1.1 billion, the bigger concern is how much the nation's largest savings and loan might write off in its home loan portfolio through 2011. Some analysts have said the thrift's $12 billion to $19 billion forecast might be too low.
Meanwhile, analysts expect the Midwest regional bank National City next Thursday to post a fourth straight quarterly loss, hurt by mortgages it kept when it sold its subprime unit to MerrillLynch . Merrill Thursday posted its own $4.9 billion quarterly loss, disappointing investors.
While results at larger lenders might get more attention, Ghriskey is also focused on smaller lenders that might have made loans too readily, or been slower to take write-downs.
"We worry about the potential for additional seizures by the FDIC (U.S. Federal Deposit Insurance Corp)," he said. "We have had only five seizures this year, and for the financial crisis we're in, that's very few."