Analysts to Investors: Go for Bank Stocks
Finance analysts recommend bank stocks as the smart play investors should make a move on. Ever since the U.S. Treasury Department ordered stress tests in May, the banking industry has accumulated a total of $16 billion in equity, which places them in a more stable position to deal with expected surge in commercial real estate-related losses.
Last month, bank stocks were among the highest gainers. Bank of America shares rose 9.9% to $11.73. JPMorgan Chase & Co. shares gained 6.7% to $37.26. Shares of Citigroup Inc. also rose 16 cents to $3.64. State Street shares gained 8.5% or $3.28, raising it to $41.79.
According to Richard Green of the Lusk Center for Real Estate at the University of Southern California, the latest surge in bank valuations are enticing but they are not without risk. The challenge for investors is to distinguish which names are most likely to rebound.
Banking analyst Anthony Polini of Raymond James (RJF) sees Bank of America as one of three banks to prevail and benefit from slow growth until 2010. Together with JPMorgan Chase and Wells Fargo, the three banks combined control a third of consumer bank deposits in the U.S. With slow economic growth, borrowing rates will remain low. Weaker banks who face capital deficiencies will give these three banks pricing power to charge higher interests on new loans.
With recession recovery moving at a slow pace, Green observes that banks need to prepare for the imminent problem that will come down as commercial real estate loans mature in the next two or three years. He estimates the amount to be at $350 billion.
This aside, Standard & Poor’s Erik Oja cautions weary investors that “if they wait to see commercial loan default rates or losses peak before putting money into bank stocks, they will probably miss the boat on some good opportunities.”