There was some good news in the FDIC's latest quarterly report. For the first quarter, the banking industry reported its highest quarterly earnings since before the financial crisis. The amount set aside to cover bad loans declined 60% year over year. The deficit -- yes, deficit -- in the FDIC's deposit insurance fund dropped to $1 billion from $7.4 billion. The pace of bank failures is slower this year than last. .
The bad news? Net revenue declined more than 3% year over year, only the second decline in 27 years. The earnings improvement was concentrated among a mere 1.4% of banks -- the biggies -- which garnered about 85% of the industry's profits. The FDIC's list of "problem" banks -- those at risk of failing -- continued to grow, to a whopping 888, up from 884. That's one of every eight U.S. banks,.
FDIC Chairman Shiela Bair believes that although new regulations are hurting banks, the root cause is "a broader problem with the economy." She warned that "many institutions are still struggling" and that "we're approaching a critical point in the credit cycle, where banks are starting to compete more aggressively for quality loan customers ... so we may face the risk of the pendulum swinging too far back in the other direction, with banks having incentives to substantially relax lending standards in the pursuit of scarce loans."
In other words, banks may be starting another race to the bottom before fully recovering from the last one.
Who owns this stuff, anyway?
Then credit-rating agency Moody's went and said that it's concerned about the government's willingness to support big banks. All in all, it made me wonder who owns these stocks. I already knew that short sellers have big bets against financial-services stocks, especially regional banks. But there are two sides to every trade. Who's betting against them?
In the case of many banks, it appears that index funds have unusually large positions. Index funds are chartered with matching an index and make no attempt to decide whether they like or dislike a stock. Despite their strong track record as fund investments, when it comes to stock picking it could be fair to say they are dumb money. They don't even try. Their existence is based on the premise that stock picking is a loser's game.
If actively managed mutual funds like a stock, they'll own more than index funds. If actively managed mutual funds dislike a stock, they'll own less than index funds -- leaving more in the portfolios of index funds. Overall, index funds account for about 15% of assets in U.S. stock mutual funds. Therefore, if index funds own more than 15% in any particular stock, it's a sign that stock is out of favor with actively managed funds. When it comes to bank stocks, the sign is flashing red.
Index Fund % of Top 10 Mutual Fund Ownership
PNC Financial Services Group
Sources: CNBC and author's calculations.
Mutual funds aren't the only institutional investors, so let's take a look at total institutional ownership. Institutions own the overwhelming majority of shares in U.S. companies, so we expect these figures to be pretty high. That said, there is a good deal of difference from one bank stock to another. (Here, a lower number could be a bad sign.)
Institutional Ownership (% of Shares Outstanding)
|PNC Financial Services Group||83%|
|Average of These Eight Banks||75%|
Index fund and institutional ownership, along with short interest, offer insight into what professional investors are thinking. These figures can contain helpful information, particularly when they agree. For example, by both measures Huntington Bancshares is the least favored of the eight banks in this story, while PNC Financial is the second most favored. In addition, the relatively high representation of index funds among mutual fund holders of these stocks is a negative call on the group, albeit more for some stocks than others.
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Fool contributor Cindy Johnson has been underweight financials since 2008. She does not own shares in any security in this story. No way. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.