The lead article in the March 2013 issue of Bank Watch is “What to Make of the Bank Stock Rally?,” authored by Jeff Davis, managing director, and originally published on SNL Financial (republished with permission). The article begins …
Banks and most financials have been frustrating since rebounding from the depths of the second half of 2007 through the first quarter of 2009 panic. Periods of outperformance have been followed by stretches of underperformance. The current cycle is one of outperformance following a steep selloff in third quarter of 2011 as a result of the Washington debt ceiling debacle and a near Lehmanmoment in Europe when the intra-bank funding markets locked-up. Since October 1, 2011 the SNL Small Cap U.S. Bank Index has produced a total return of 49% through February 8 vs. 45% for the Russell 2000. The SNL Large Cap U.S. Bank Index had a total return of 63% vs. 38% for the S&P
The rally is less impressive if it is dated to year-end 2010 with large cap banks underperforming by rising 11% vs. 26% for the S&P 500; small cap banks lagged the Russell 2000 at 16% vs. 20%. Viewed from a bit longer horizon, returns for bank stocks similarly lag if the starting date is March 31, 2010, which coincided with a peaking of many large cap bank stocks following the rally that began on March 9, 2009 when Secretary Geithner indicated there would be no nationalization. Between March 9, 2009 and March 31, 2010, large cap banks posted a 202% total return vs. a mere 101% return for the S&P 500. This rally followed a brutal 21-month sell-off that got underway in mid-2007 when housing was clearly rolling over and securitization markets froze.I think one aspect of the bigger swing in the large cap banks since 3Q11 reflects the direct and indirect European exposure of JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and a few other large banks that dominate the index. It was the ECB’s announcement in early November 2011 that it would address the funding issues (European banks are much more reliant on wholesale funding than U.S. banks) through the longer-term refinancing operations (LTRO) that became a catalyst to rally European banks and global equities. Also, housing found a bottom in 2012 and has been improving in many markets since then. The turn in housing and attendant demand for distressed assets was important in driving NPAs lower at high NPA banks such as Regions Financial Corporation (RF) and Synovus Financial Corp. (SNV) and thereby aiding last year’s rally.
So what to make of the current rally? ….
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