Banking sector shows signs of stability
Banking sector shows signs of stability
david gerard
The US banking sector is beginning to show signs of recovery despite mounting controversy surrounding the foreclosure crisis. When allegations of improperly filed foreclosures and unlawful home repossessions made national headlines at the beginning of the fourth quarter, bank stocks experienced a sharp sell-off. Still, analysts at top investment banking firms are confident that banks are becoming stable and will continue to do so in the long term.
There are several important reasons why analysts believe that stability will return to the banking sector. Some of the largest capitalized banks have reported earnings that surpassed Wall Street’s estimates, thanks to lower than expected losses in their mortgage loan and credit card portfolios. Although banks are still experiencing net charge offs due to their non-performing assets, the pace of their losses has slowed down considerably and their business fundamentals are looking strong.
Another sign that points to the banks’ return to stability is the data recently released by the FDIC concerning bank failures. While it is estimated that the number of bank failures in 2010 will be similar to the record numbers of 2009, the failures these days are limited to institutions with small amounts of deposits. These failures do not place a severe strain on the FDIC’s deposit insurance fund, unlike the spectacular failures of mega-banks in 2008.
A savvy stock broker is likely to see a long term buying opportunity when comparing the current prices of bank stocks relative to their stable outlook. The recent bearish sentiment among investors regarding bank stocks can be attributed to speculation and “trading on the news”. When the news media reported that the US Attorney General ordered an inquiry into the foreclosure practices of several banks, a few investors may have overreacted by selling off large volumes of their bank stock holdings which quickly escalated into a sell-off. This is known in Wall Street as “herd instinct”, a tendency among investors to follow the actions of others and cause unsubstantiated movements in the market.
The fact is that current mortgage losses for the banks that make up the Dow Jones US Bank Index are significantly lower than they were in the last two years. Some of these banks were recipients of significant bailout funds from the US Treasury at the beginning of the financial crisis, and they have since been able to repay billions of dollars while still managing their deposits and credit portfolios. Analysts are certain that the non-performing assets held by US banks will continue to decline, thus bringing much deserved stability to the banking sector.
Stock brokers, day traders, and other denizens of the online trading who actively trade bank stocks have been carefully monitoring the progress of banks as they strive to become stable. Bank stocks are popular among online traders due to their typically large trading volumes which allow investors to try different strategies. Once banks become stable, their stocks will be easier to trade and less vulnerable to speculation.
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Categories: Investment Bank Analyst
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