Will Bank Stocks Rally Again This Year?

Financial stocks have rallied 140% since last March’s lows. Many investors are wondering if financials will continue their run this year given the jobless economic recovery currently underway.

An article titled “Do you dare buy banks?” in the latest edition of Bloomberg BusinessWeek mentions that financials in the S&P 500 are expected to rally 16% this year based on some analyst forecasts.

From the article:

No U.S. industry has faster profit growth than banks and brokers, and no group is more bad-mouthed by investors. It may be time for them to get over their distaste, says Mark Giambrone, a fund manager for San Antonio-based USAA Investment Management, which oversees about $74 billion. “The stocks are clearly too cheap,” says Giambrone, whose USAA Value Fund (UVALX) owns Wells Fargo (WFC), PNC Financial Services (PNC), and Bank of America (BAC), among other financial stocks. “There may be some bumps in the road ahead, but for the most part those are reflected in valuations.” The Standard & Poor’s 500 Financials Index (S5FINL) of 78 banks, brokerages, and insurance companies is down 60% since peaking in February 2007, more than twice the drop of the S&P 500-stock index.

Many of Giambrone’s peers remain unconvinced that all the pain has been taken in financial stocks. A survey by Bank of America found financial shares the least favored stocks among 123 money managers. But earnings at financial companies rose an estimated 120% in the fourth quarter, accounting for all the income increase in the S&P 500, data compiled by Bloomberg show. Those financial company earnings should triple by 2011, climbing four times as fast as the market, analysts figure. Should those estimates prove correct, financial shares are trading at about a 15% discount to the S&P 500.”

Banks are still not out of the woods yet. After last year’s 140 banks failures, so far four banks have failed this year. In addition to the slowdown in foreclosure activity in the housing market, there are some signs that credit card charge-off rates are declining. A Reuters report yesterday said:

“U.S. credit card data for December showed some signs that fewer consumers were falling seriously behind in their payments.

Four out of six companies reporting credit card activity for December said charge-offs declined in the month.

Delinquency rates, which portend future credit card defaults, declined at all of the companies except JPMorgan Chase & Co (JPM.N), according to regulatory filings on Friday.”

In the tables below I have listed banks paying more than 3% dividends:

1) Bank Stocks Trading in the NYSE

[TABLE=294]

2) Bank Stocks Trading in the NASDAQ

[TABLE=295]

Investors have to be very selective in  picking up bank stocks as there are still many unknown headwinds that banks face this year. To quote former Secretary of Defense Donald Rumsfield:

“As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know.”

While some of the banks above high yields because their share prices have fallen, there are some banks that are stable and are worth looking into. A few of these banks are Bank of Hawaii(BOH), Cullen/Frost Bankers Inc(CFR), etc.

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