Analysis: U.S. bank stocks face bumpy road ahead

By Joe Rauch and Elinor Comlay

CHARLOTTE, N.C./NEW YORK (BestGrowthStock) – Investors looking for reasons to rekindle their on-again, off-again love for U.S. bank stocks are in for a long wait.

Sluggish U.S. growth, high levels of unemployment, rising foreclosures and weak consumer spending have sent bank stocks into a long dive this summer — reversing their fortunes from only a few months ago, when investors saw signs that the industry might be crawling out of the two-year-old financial crisis.

Now a faltering economic recovery, paired with sweeping regulatory reforms passed in July and more capital raises looming on the horizon, has analysts and investors predicting that a full recovery of bank earnings and share prices could take years.

Investors could keep trying to call the bottom on stocks, making for a roller-coaster ride, but for now analysts said the prognosis for banks is not good.

“Overall, banks, I think, are going to have a pretty tough go of it going forward,” said Jon Fisher, analyst at Fifth Third Bancorp. “It’s going to be a function of how much further … (and for) how much longer things slow down.”

The KBW Bank Index — comprised of some of the biggest U.S. bank stocks — has tumbled 27 percent since its 2010 peak on April 21, nearly wiping out its gains from earlier this year.

Bank of America Corp (BAC.N: ), the largest U.S. bank by assets, has seen its shares slide 37 percent from a $19.82 peak on April 15.

Shares of Birmingham, Alabama-based Regions Financial Corp(RF.N: ) have declined 35 percent since a peak of $8.58 on April 21.

ECONOMY SPUTTERS

No one can say for sure where the economy is headed, but data this week have added to the gloom.

New U.S. home sales slumped to the slowest pace on record in July; and while the number of homes headed for foreclosure fell in the second quarter, the number of newly delinquent homeowners rose.

BofA, the country’s largest mortgage lender, said first-mortgage originations in the second quarter fell 35 percent from the year-earlier period to $71.9 billion.

Loan demand is likely to remain weak as long as the U.S. job market continues to be shaky, analysts said; and with the U.S. unemployment rate at 9.5 percent, the signs there are not good either.

Growth slowed more sharply than initially thought in the second quarter. Gross domestic product expanded at a 1.6 percent annual rate, lower than the 2.4 percent pace the U.S. Commerce Department estimated last month.

The tide of weak data so far for July has prompted some economists to lower their growth forecasts for the third quarter.

Consumers are paying down debts, saving more and spending less. One of the primary drivers of U.S. loan demand — home mortgages — has struggled this year.

Without new loan demand, banks would struggle to report healthy profits, analysts said.

“More than anything else, what might be most impactful is a reduction in earning assets because of repayment (of loans),” said Gary Townsend at Hill-Townsend Capital in Chevy Chase, Maryland.

CAPITAL NEED

U.S. banks, which scrambled to raise billions of dollars in capital last year in the aftermath of the financial crisis, could be forced to raise more as part of new reforms, including the Dodd-Frank Act’s prohibition on counting trust preferred securities as core bank capital.

While the largest U.S. banks would still find a market for their offerings — albeit with more dilution for existing shareholders — smaller banks could struggle.

“The banks on the bottom end are in a jam,” said Bob Patten, a bank analyst at Morgan Keegan & Co.

For some banks, the broad decline in stock prices also makes it harder to repay funds they still owe under the U.S. Troubled Asset Relief Program’s bailout aid.

Three major regional banks — Regions Financial, SunTrust Banks Inc (STI.N: ) and KeyCorp (KEY.N: ) — have yet to repay a combined $11 billion in TARP funds. The U.S. government requires the repayment to be funded, at least in part, by raising new capital from outside investors.

Each of these banks’ stocks has dipped by 25 percent or more since peaks this spring.

Investors are merely trading the minor ebbs and flows of banks’ share prices, rather than making long-term bets, Patten said.

“Now they’re a punching bag,” Patten said, referring to bank stocks. “The market’s broken, to be honest.”

(Reporting by Joe Rauch and Elinor Comlay, editing by Gerald E. McCormick)

Analysis: U.S. bank stocks face bumpy road ahead