The outlook for bank stocks has considerably worsened as the European debt crisis and the possibility of a double dip recession looms. This has led to plummeting bank stock prices even though asset quality has rebounded, profitability has improved for many banks, fewer banks are failing and the number of banks and thrifts that are on the FDIC’s list of “problem” institutions is slowly dwindling.
The largest banks in the country have been particularly hard hit by worried investors selling off stock, as the biggest banks are thought to have more exposure to the troubled European debt and global equities markets. As Marty Mosby of Guggenheim Securities explains, bank stocks aren’t paying the dividends that traditionally have cushioned their stock prices. Now, they are a risk play with little reward.
Top Capital Raises for 2011 as of September 20 // Bank of America, Sept. 1, $5 billion, preferred equity
(Berkshire Hathaway investment) // Wells Fargo & Co., March 15, $2.5 billion, preferred equity // Capital One Financial Corp., July 13, $2 billion, common equity // Bank of America, July 7, $2 billion, senior debt (Source: SNL Financial)
Marty Mosby, a managing director at Guggenheim Securities, talks about what moves bank stocks, what banks could do to attract investors and how long it will take for real improvement in the outlook for banks.
Investors don’t seem to like bank stocks right now. Why?
Historically, you have had dividends and tangible book value as a source of support for bank stocks as the earnings deteriorate because of economic cycles. You haven’t had that this time. Today, we have all these negative risks in the economy: the U.S. economy stalling, the yield curve flattening and therefore revenue for the balance sheet going down, the European debt crisis and investor lawsuits. There is very little to balance that. Investors are very uncertain about the U.S. economy and that’s why everyone exited bank stocks.
What should bank directors and banks do?
I would focus on reducing my risk. I would want to make sure we’re resolving any of these issues as quickly as possible. I would talk to my management team about how we can get our dividend back up to a level where we can support a stock price, a level we think we should be valued at.
Forward looking statement: We’ll wake up at the end of 2012 and see we’ll have made a lot of progress relative to these issues. As we get into fourth quarter of next year, there will be a number of banks who have already paid back (Troubled Asset Relief Program) money and will focus more on return to investors. We will see dividends go up. We only had a handful of banks like U.S. Bancorp and PNC Financial Services who were able to increase dividends. SunTrust Banks, First Horizon National Corp., Fifth Third Bancorp will start paying up.
Fred Cannon, the director of research and chief equity strategist for Keefe, Bruyette & Woods, follows up on his prediction a few months ago that Northeast banks such as M&T Bank and First Niagara Financial Group were in a position to grow because the Northeast had avoided the worst of the housing bubble. Since then, First Niagara announced plans to acquire 195 New York bank branches from HSBC Bank USA and $15 billion in deposits, giving it $30 billion in total deposits following the completion of the deal. However, both M&T and First Niagara stocks have been clobbered, just like other bank stocks.
“We still like the region on a relative basis,’’ Cannon says. “It is, in general, a slow growth region, though. The credit quality continues to be excellent up there.”