Nancy Bush
NAB Research, LLC, is a South
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independent research on financial services stocks to institutional investors.
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Bank Statements
The Waiting Room
Boyare people ever
grumpy. I knowwere in the midst of one of the worst winters of
recent years, February is an unremittingly grim month anyway, the news
from Washington (and now Europe) is pretty bad, and were all
continuing to deal with the aftermath of the 00s. And bank
stock investors have good reason to be especially morosethese stocks are
going nowhere after their sharp rebound from the depths of March, 2009, and new
obstacles for the banks seem to arise on a weekly basis. Whats the issue
this week? Is it the likelihood of ongoing tidal waves of foreclosures in the
housing industry? Is it the newest Washington iteration of financial services
reform? Is it the newly-arisen issue of the need for the mortgage servicers to
provide ever more reserves for mortgage reps and warranties? Pick
your poisonand you can find it right now in the banking
industry.
Readers know that I have
seldom chosen to serve as a cheerleader for the banksespecially some of
the bigger and dumber onesand I wont try to do so now. But as I
have talked to clients recently and listened to the litany of concerns about
the banking industry, I continue to be struck by one thingthe absence of
almost any conversation about an earnings recovery. We all need to remind
ourselves of one thingearnings matter, and in the end they will be all
that will matter. The White House can continue to browbeat, Greece can
continue its march toward third-world status, Paul Volcker can continue his
rules tour, but in the end, none of this can obscure the fact
that credit quality will turn, loss reserves will stop being built, and at some
pointaccounting rules remaining unchangedthose reserves will need
to be drawn down. And all of this would likely occur simultaneously with a
rebound in commercial loan demand and at a time when the yield curve remains
relatively steepand at that point, sentiment will change on a dime,
and change massively.
Its true that we will
not return to the conditions of 2005 and 2006but thats not a bad
thing. Yes, consumers will continue to de-leverage, the credit card
business will be downsized and its profitability characteristics will be
altered, and the banks will have to work their way through the maze of new
restrictions on consumer fees. Most importantly, they will have to continue to
carry large levels of capital on which returns will be depressedat least
in the near term. But bear in mind that nothing is forever in the banking
industry. It seems to be sinking in in Washington that banks have chosen to
hoard capital at the expense of lending to small business, and that job
creation is suffering as a result. I think that the signs are that White House
is beginning to get it when it comes to the reality of the 2010
electionsand that the rhetoric and the reality around the banking
industry are changing as a result.
I would also hazard one other
observationthat the ongoing travails of Bank of America (BAC-Hold) are
having an outsized impact on sentiment around the other bank stocks. The
role of industry bellwether has shifted from Citigroup (C-Not covered)
to BAC as Citi has been downsized and its domestic relevance has withered,
and the ongoing use of BAC as a convenient whipping boy for agendas of the
Judge (Rakoff) and the Executioner (Cuomo) continues to serve as a convenient
reminder of the banking industrys ongoing state of low public regard.
This too shall pass. BofA also has only to sit there and wait for credit to
turnwhich may be happening even as I write thisbefore even their
beaten-up status begins to change. I admitbeing in the waiting room
and in a state of endless anxiety is no fun, and thats where all of us
who care about bank stocks are presently. But just remember the rush of relief
that comes when its all overand that day is coming.
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