Bank credit worries takes steam from financials' rally
High-flying sector ricochets as analysts look to 2010, big investors take stake
Laura Mandaro
MARKETWATCH — 8 MINUTES AGO
SAN FRANCISCO (MarketWatch) -- Conflicting views over lingering credit problems are whipsawing financial stocks, which have outpaced the broader market in the latest leg of the rally, potentially setting the sector up for a steeper fall even as some analysts see fresh reasons to buy beaten-down stocks.
On Friday, the sector slid 1.4%, after a gloomy analyst note about insurer Genworth Financial Corp.'s prospects gave investors a fresh reason to sell off some financial stocks along with the broader market pullback. Genworth (Symbol : GNW
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) lost 6.6%, the fourth-worse decliner on the S&P 500 .
But, in keeping with the back-and-forth nature of financial stocks in recent days, two regional banks - BB&T Corp. (Symbol : BBT
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) Corp. and Regions Financial (Symbol : RF
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) -- rallied sharply to clock in the best performance among large-cap stocks.
Regions jumped 8.6% after analysts at Bank of America-Merrill Lynch upgraded the stock to buy from hold, citing the company's relative capital cushion, according to flyonthewall.com. See more analysts' actions on MarketWatch.
Against this turbulent backdrop, the broader S&P 500 financial sector -- as measured by the Financial Select Sector SPDR exchange-traded fund - has gained 27% since the recent surge in U.S. stocks got going July 10. That's compared to a 14% rally on the S&P 500.
Some investors and analysts say they're still worried that banks and other financial institutions could book more ugly losses from exposures to real estate and mortgage markets.
"I'd love to buy banks, but the problem is when you come off the biggest credit bubble in history," said Jeff Auxier, chief executive of $400 million Auxier Asset Management in Lake Oswego, Oregon.
Mid-sized banks, for instance "look cheap but you don't know how much they need to shore up their balance sheets," he said.
Citigroup (Symbol : C
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) analyst Colin Devine on Friday cited "deteriorating fundamentals" for his decision to cut Genworth (Symbol : GNW
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) shares to sell from hold, saying a recent rally in shares pushed them to a level "where we no longer find them attractive given a very uncertain earnings outlook and capital position."
Keefe Bruyette & Woods analysts started the week off suggesting that the prior week's rally "is likely to fade as the economic rebound turns out to be modest and credit issues linger well into 2010 and beyond."
Even more damning, Miller Tabak analyst Thomas Mitchell said he expected many banks to report either near-zero or negative earnings per share next year, putting expected earnings at odds with current prices and prompting him to slash Zions Bancorp (Symbol : ZION
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). and Regions Financial Corp. (Symbol : RF
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) ratings to sell. Shares in Zions, a regional bank based in Salt Lake City, dropped 8.4% on Tuesday and, despite a recovery in recent days, are set to end the week 0.7% lower.
Day trader's paradise
Despite concerns by Mitchell and others, the sector has also staged big one-day recoveries on some days as investors took heart from signs of U.S. economic recovery and the disclosure that a well-known investor had bought up bank stocks.
Stocks in national banks such as Bank of America Corp. (Symbol : BAC
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) and mid-sized regional banks such as Fifth Third Bancorp (Symbol : FITB
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). , Zions and SunTrust Banks (Symbol : STI
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) bounced sharply higher Thursday after hedge fund manager John Paulson revealed his firm had added shares in several banks in the second quarter.
Some of these stocks have been favorites of investors, in part because they fell so heavily in the past year.
On Friday, Bank of America (Symbol : BAC
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) was one of the only two gainers on the Dow Jones Industrial Average, rising 2%.
And brokerage analysts, despite some dissension about how credit will affect the companies' outlooks, have largely grown more optimistic
Analysts, on average, have raised their median price targets for Bank of America Corp. (Symbol : BAC
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), J.P. Morgan Chase & Co. , Citigroup (Symbol : C
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) and Fifth Third since June 30, according to Thomson Reuters. They've cut them on Regions Financial (Symbol : RF
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), Marshall & Ilsley Corp. (Symbol : MI
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) and Zions.
Limiting Friday's losses in financial stocks, BB&T Corp. (Symbol : BBT
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) shares jumped 9% after media reports said the bank is likely to take over struggling lender Colonial BancGroup (Symbol : CNB
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) , a deal that would be supported by the Federal Deposit Insurance Corp. The bank regulator has been shutting down failing banks, liquidating some and brokering others' sales to stronger institutions.
With $26 billion in assets, Colonial would represent the largest bank failure of the year.
Friday's trading
On Friday, the benchmark U.S. stock indexes fell sharply, adding to early losses, after the Reuters/University of Michigan survey of U.S. consumer sentiment made a surprise drop and fell short of economists' forecasts. Materials, energy and consumer discretionary sectors led declines.
The Dow Jones Industrial Average fell 115 points, or 1.2%, to 9,282.4. The S&P 500 lost 12 points, or 1.2%, to 1,000. The Nasdaq Composite lost 29 points, or 1.5%, to 1,981.
"Today, the concept of 'less bad news is good news' is losing steam," said Richard Hughes, co-president of Portfolio Management Consultants, which advises financial advisers.
The S&P 500 is set to end the week down 0.9%, the Dow industrials is headed for a 0.9% weekly loss and the Nasdaq is headed for a 1% weekly decline.
"I think the numbers indicated that people are generally optimistic but at the same time very cautious about their own spending habits," said Hughes of the consumer sentiment index.
Along with Genworth (Symbol : GNW
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), Etrade Financial Corp., real-estate firm ProLogis (Symbol : PLD
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) and regional bank Marshall & Ilsley (Symbol : MI
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) represented some of the biggest decliners on the S&P 500.
