Like the rest of the market, bank stocks have taken a beating in August, led by Bank of America, which is down 40% over the past four weeks. But investors waded back into the sector Wednesday, propelled by a surprisingly upbeat assessment of BofA that pushed its shares up almost 11% for the day.
Those positive comments came from Meredith Whitney, the influential founder of Meredith Whitney Advisory group, who told Bloomberg News Wednesday morning that Bank of America was in better shape than investors have been giving it credit for, and that the banking behemoth didn’t need to raise capital – a particular sore spot for investors in recent weeks.
She also called CEO Brian Moynihan, the “right guy for the job.”
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Traders credit the Whitney endorsement for bolstering Bank of America stocks, and possibly major bank stocks in general. Goldman Sachs, JP Morgan Chase and Citigroup all saw their shares rise Wednesday, in the aftermath of Whitney’s comments.
By and large, investors have been sour on bank stocks for three big reasons:
- Deep concerns over the financial health of bank balance sheets
- Broad exposure to toxic home mortgages
- Exposure to U.S. and Europe’s problematic debt picture
While those issues haven’t gone away, there’s a growing sentiment on Wall Street that the penalty banks paid in weaker share prices may have been too severe. That could explain why more and more analysts view bank stocks as cheap, and that they could represent good buying opportunities.
“Many banks are selling below their liquidation values, let alone their franchise values,” Rochdale Securities analyst Richard Bove wrote in a research note Wednesday. “Many should be bought.” Bove says that 22 of 51 banks he tracks are selling at a discount right now – and he includes Bank of America on that list.
Further bolstering bank stocks was news from the Federal Deposit Insurance Corp. (FDIC) that U.S. banks appear to be on the road to recovery.
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This from the FDIC on Tuesday:
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $28.8 billion in the second quarter of 2011, a $7.9 billion improvement from the $20.9 billion in net income the industry reported in the second quarter of 2010. This is the eighth consecutive quarter that earnings registered a year-over-year increase. As has been the case in each of the last seven quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings.
“Banks have continued to make gradual but steady progress in recovering from the financial market turmoil and severe recession that unfolded from 2007 through 2009,” said FDIC Acting Chairman Martin J. Gruenberg. He added that “this trend has expanded to include a growing proportion of insured institutions.”
The FDIC also notes that the number of “problem” U.S. banks declined from 888 to 865 in the second quarter, the biggest decline in the last 19 quarters.
That, and the Whitney comments, may explain why banks are seeing slivers of sunlight after weeks of dark clouds.