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Are Bank Stocks the Next Bonanza? (On the Street)
Posted by admin 304 days ago (http://www.smartmoney.com)Bankers may never want to hear the words "stress test" again. After all, they've just gone through a torturous exam of their corporate finances, and 10 big banks have been told by regulators that they need to raise $75 billion in capital as a buffer against potential losses. But now that the tests are over, is it time to dip into the stocks?
Banks certainly look a bit healthier than a few months ago. Companies such as JP Morgan Chase (JPM) and Wells Fargo (WFC) reported strong first quarter profits. And the KBW Bank index, a basket of major bank stocks, has more than doubled since early March. Some analysts think bank finances aren't so shabby either. Rochdale Securities analyst Dick Bove, a 30-year industry veteran, points out that the big banks now have $1.1 trillion in equity and reserves, or more than 10% of their assets, one of the highest levels since the Depression. And they have so much cash on hand, he says, they're in an "extraordinarily strong" position.
Yet not even the most bullish analysts expect a quick return to the money-minting days of the real estate boom. Loan losses are still rising, and even though banks are posting profits, they may have to issue more common stock, a move that would "dilute" the stake of existing shareholders and lower earnings per share. Some pros are also skeptical that banks have come clean about the extent of their losses. "You're really blind when it comes to the banks," says William Fries, co-manager of the Thornburg Value fund (TVAFX), which has largely avoided the sector. "You can't see into their portfolios."
Still, if the worst really is over for banks, experts like Bove say the stocks could rise sharply over the next few years. One way to get exposure is with an exchange-traded fund such as the SPDR KBW Bank ETF (KBE), which tracks an index of 24 large banks and yields 6.1%, nearly double the average yield of the S&P 500. Individual stocks are riskier, of course, though they have more upside potential too. Raymond James analyst Anthony Polini recommends Bank of America (BAC), figuring earnings could hit $4.18 a share by 2013, up from an estimated 60 cents this year, making the stock look cheap.
Another option: Bank of New York Mellon (BK). Stuart Plesser, equities analyst at Standard & Poor's, points out that the bank has managed its loan portfolio conservatively and should be able to grow earnings at a 27% clip over the next three years. The stock has more than doubled lately and traded around Plesser's $30 price target. But he recommends it for the long haul. Plus, the bank aced its stress test; according to the feds, it has enough capital. At least for now.
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