Analyst Forum

Market Intelligence

Bank stocks have been doing well, especially big bank stocks. As of late September, the Keefe, Bruyette & Woods big bank index rose 22 percent from the start of the year, compared to 13 percent for the S&P 500.

Anthony Polini with Raymond James & Associates talks below about why it’s good to own bank stocks during the early stages of a recovery, and this economic recovery certainly seems to be taking its own sweet time.

Profitability has improved for many categories of banks during the quarter, and the industry is very well capitalized as a whole. But net interest margins are stuck in low gear. The Federal Reserve has promised to keep rates low, which many analysts worry will put a damper on bank profits for a long time to come.

Bank mergers and acquisitions picked up slightly during the most recent quarter, led by M&T Bank Corp.’s recent proposal to buy Hudson City Bancorp for $3.8 billion.

What’s Ahead?

Anthony Polini is a managing director at Raymond James & Associates in New York and covers large and regional banks, such as JPMorgan Chase & Co., Citigroup Inc. and Hudson City Bancorp.

What is your outlook for bank stocks?

I personally think a Republican victory [in the presidential election] would be better for bank stocks and the stock market in general. The one caveat is interest rates. There is a point where you keep rates so low for so long, even if you have growth, the incremental yield comes down, which is a headwind for earnings growth.

You want to overweight banks from the latter stages of a recession to the mid-stages of a recovery. One of the problems with this recovery is we are in the early stages of a recovery. It is slow. The economy is on two or three cylinders, not eight cylinders.

So you think investors should be sure to have bank stocks in their portfolio? What are your favorite picks?

Yes. You have some that are super, high-quality names and have high dividends. A top pick in that category has been [the $43.5-billion asset] New York Community Bancorp. It has a dividend yield of 7.5 percent and trades slightly above book value. It’s at a relatively safe valuation to play the sector and pick up a high dividend yield.

For a longer version of this interview and more data on bank stocks, see Analyst Forum at BankDirector.com.

Stock Retrospective

Ken Usdin, managing director at Jefferies & Co., predicted in June that bank stocks would remain choppy under the macro-economic concerns and the weight of Europe’s problems. He also predicted that PNC Financial Services Group would do well. But compared to other banks in the last few months, PNC has lagged slightly. It has risen about 11 percent since the start of the year through the end of September.

“It’s underperformed,” Usdin says. “If you looked at some of the other banks, it hasn’t done as well. They had a disappointing summer earnings [report.] But they have decent avenues for growth. They are growing loans organically at a decent clip. They are a fairly efficient organization underneath the surface. Their valuation is still relatively attractive compared to their peers.”