Banks! No other industry is more hated and no other industry has faster profit growth after coming to the brink of collapse. The analyst community at large believes that financial companies earnings are likely to have risen 120% in the fourth quarter! Quite a number in our opinion. Although we always want to see strong earnings growth from any US company we believe this might be a bit excessive in its prediction.
Still, for many that’s not enough after feeling over a 50% drop in US indexes over the last two years along with 160 financial institution failures. Banks at this moment are the least favored at this moment for a variety of reasons but they may be the one’s offering the most opportunity and bang for the buck with those who have a good risk tolerance level. Mark Giambrone, a fund manager for USAA Investment Management Co., stated that the “The stocks are clearly too cheap,” and that “There may be some bumps in the road ahead, but for the most part those are reflected in the valuations.” It’s hard to fight with that logic at times when Citigroup still trades for less than $5 as an extraordinary example and the fact that the S&P Financials Index gained 15 percent in 2009.
Bank of America in particular is forecasted to illustrate among the U.S. banks according to data Bloomberg data. It is currently rated a “buy” by 25 of the 32 analysts who track the company Bloomberg data shows.
Analysts at this time believe profits could climb up to $.93/share in 2010 relative to a $.2/share loss in 2009.
At this time the analyst community is more bullish on bank stocks in the S&P 500 than anything else. They’re calling out a 14 percent rally among the group according to information from Bloomberg. That would pretty impressive rally since its 145 percent rally since March!
Financial companies continue to benefit from the Federal Reserve zero interest rate policy. Currently, the yield curve that measures the differential between the 2- and 10-year Treasury yields reached a record 2.88 percentage points in the prior month. This would easily allow banks to profit from this difference in yields.
Further, net interest margins could widen to 3.54% for 2010. The banks money make here through via the difference between what they pay to depositors and what they earn from loans.
Bob Doll, vice chairman and chief investment officer for global equities at BlackRock Inc., brought a strong point about banks. Stating that investors want to know that when “are all the assets that are classified as performing going to perform?” Doll himself doesn’t seem convinced yet as he stated on January 6th, 2010 that this “is the concern. We would wait for some price pullback and have patience before buying.”
What can be taken away from this news and information is that the banking industry as whole is healing and that matters whether you hate the industry or not. Money makes the world go round and they hold the key to capital thus it’s in everyone’s interest to see them do well. Though we see the banking industry mending still we would feel reluctant to deploy capital to the industry as a whole and would prefer to individually pick banks that we have confidence in and that have long term growth potential.
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