Bank stocks got a boost Thursday from an upbeat outlook on the industry from a group of RBC Capital Markets analysts who contend that the worst of the financial crisis is over.
The KBW Bank index, which tracks 24 of the nation's largest banks, rose 3.1 percent in midday trading, after posting small declines earlier this week.
RBC raised its rating on the financial sector to "Overweight" from "Market Weight," saying capital and liquidity risks have been significantly reduced. Banks are now in a position to outperform the broader market for several years to come, the analysts said, after underperforming the market for the past few years.
Among the biggest gainers Thursday was KeyCorp, which RBC upgraded to a "Top Pick." Shares of the Cleveland-based regional bank jumped 60 cents, or 13 percent, to $5.20.
Other top performers included PNC Financial Services Group Inc., which rose $2.74, or 6.8 percent, to $43.07, and Fifth Third Bancorp, which added 63 cents, or 9.7 percent, to $7.15.
Banks saw the value of their stocks plunge as defaults on loans and foreclosures soared in the wake of the housing and credit crises of last fall. But since early March, financial stocks have been a driving force of the market's spring rally, as first-quarter results largely surpassed expectations and banks appeared to be on more solid footing.
To be sure, 2009 earnings will continue to be hampered by higher credit costs, the RBC analysts said. But credit pressures should begin to ease in 2010 as the economy improves.
"The U.S. economy is expected to exit the recession sometime later this year and/or early 2010, which should have a very positive impact on bringing the industrys earnings back to normalcy," the analysts wrote.
The release of the government's stress test results last month helped clear up a lot of the concerns over banks' capital levels, RBC said. The stress tests determined that 10 of the 19 largest U.S. banks needed to raise $75 billion in fresh capital to withstand potential future losses.
Since then, a number of banks the government said needed more capital, such as Bank of America Corp. and Wells Fargo & Co., have completed stock offerings to bridge that gap in reserves.
Meanwhile, banks that were deemed to have sufficient capital, like JPMorgan Chase & Co. and American Express Co., have been working to prove they can stand on their own without government support, raising capital in the public markets in an effort to repay government bailout funds.
Also good news for the sector: the cost of borrowing is getting cheaper.
The three-month dollar loans between banks _ known as the London Interbank Offered Rate, or Libor _ fell to a new low of 0.63 percent on Thursday. Interbank lending rates surged during the credit crisis, cutting the flow of money between banks and to consumers to a mere trickle. But rates have been steadily falling in recent weeks as the government's massive stimulus efforts make their way through the system.
Not everyone is as upbeat on the sector as the RBC analysts, however. Earlier this week, a group of analysts at Moody's Investors Service led by Curt Beaudouin reaffirmed a negative credit outlook on the U.S. banking industry. The ratings agency estimated that U.S. banks will take about $470 billion of loan and security losses through 2010.
Among the large banks, Wells Fargo added 58 cents, or 2.4 percent, to $24.71; Bank of America rose 33 cents, or 2.9 percent, to $11.54; JPMorgan gained $1.02, or 3 percent, to $35.
Regional bank stocks also posted big gains. Marshall & Ilsley Corp. rose 31 cents, or 5.1 percent, to $6.37, while Comerica Inc. rallied $1.37, or 6.6 percent, to $22.18.
Terms & Conditions
RSS Headlines
Fool UK