Mammoth financial institutions that have survived the government bailout process, along with their regional peers that have swallowed weaker competitors, are the best-positioned banks to succeed in 2010, according to a new report.
Keefe, Bruyette & Woods said in a year-end analysis that the banking industry as a whole will mirror the larger economy in showing slow growth next year.
But certain pockets—including global credit card companies—will outperform as conditions begin to improve.
"For financial services investors, we recommend entering 2010 focused on emerging winners who can take advantage of industry consolidation and who can benefit from emerging global growth to expand business and improve future earnings," KBW analysts said.
Among those it mentions specifically are world giants JPMorgan Chase , Bank of America, Goldman Sachs and Morgan Stanley. The firm also cites Visa and MasterCard as likely winners going forward.
On the regional banking side, KBW has "outperform" ratings on BB&T, Columbia Banking System, First Financial Holdings, First Niagara Financial Group, TriCo Bancshares, US Bancorp and Washington Federal.
The analysis comes as investors wonder whether banks can sustain the aggressive surge of the past nine months that followed perhaps the most trying period ever for banks.
A washout in global credit ensued after major institutions loaded up their portfolios on home loans to consumers unable to meet their obligations.
But financials on the Standard & Poor's 500 have gained more than 135 percent since the market's nadir on March 6.
While 130 banks have failed this year and many more remain in peril, KBW sees the strongest survivors on the path to growth now that banks are shedding their obligations under the Troubled Asset Relief Program and many of the industry's weakest sisters have been shunted aside.
"Entering 2010, we believe the US economy has already faced the worst phase of the financial crisis and is entering a period of slow economic growth, with financial transaction activity expanding," KBW said. "Global growth will likely exceed that of the United States, giving advantages to firms with global operations."
Closer to home, the industry will face challenges.
KBW this year changed the way it calculates its noted "Misery Index" to add unemployment to the percentage of households in the foreclosure process. That changes from the old calculation that measured unemployment plus inflation.
Using the new measure, the index is predicted to rise to Great Depression levels and reflect a growing divide between economic haves and have-nots going forward.
"[O]ur index highlights that a record and growing number of consumers will remain under significant financial stress throughout 2010," the report said. "At the same time, consumers not under such stress are likely to become increasingly confident, allowing moderate economic expansion."
In addition to economic stress, banks likely will face additional regulation ahead and thus continue to be reluctant to lend. KBW sees that trend as a further drag on growth but said banks still could grow by shedding debt more aggressively. Banks also could face increasing government prodding to provide loans.
More broadly, though, KBW forecasts a modest 2.4 percent growth in gross domestic product for 2010 and a slightly better 2.9 percent GDP for 2011. Unemployment is projected to hit 10.7 percent in mid-2010.
The Fed funds rate will hit 1.00 in 2010 and 2.50 by the end of 2011, while long-term Treasury and mortgage rates "will increase modestly" in 2010, KBW said.
The firm does not discount the possibility of a second leg in the recession should other economic signals deteriorate or if the government withdraws stimulus before the market is ready.
"We believe that if the unwinding of government programs occurs too quickly, or before the economy exhibits sustainable growth without government involvement, then we cannot ignore the risk of slipping into prolonged recession or another recession," KBW wrote.