Though bank stocks and the broader markets soared Monday after the Treasury Department released details of its public-private partnership plan to buy banks' toxic assets, analysts questioned whether the rally is sustainable, particularly ahead of first-quarter earnings reports.
The KBW Bank index surged 18.59%, and the Dow Jones Industrial Average and the Standard & Poor's 500 index rose 6.84% and 7.08%, respectively, after Treasury Secretary Timothy Geithner disclosed long-awaited details of his plan to deal with the industry's bad assets. The government said it would use up to $100 billion from the Troubled Asset Relief Program to leverage private capital and buy $500 billion worth of bad assets from banks. The program could expand to $1 trillion.
Despite the bullish response, key questions remain.
"The market is responding to the Treasury secretary's plan, but we still don't know how the pricing mechanism would actually work, and we don't know whether there's really adequate juice to entice holders of these assets to actually sell them," said Gary Townsend, the chief executive of Hill-Townsend Capital LLC. "If a bank is offered less than it feels … its asset is worth, they are not going to sell it. It's still not clear to me that, without the Treasury actually directing sales, a whole lot of assets are going to be sold in this program."
Analysts also have expressed fears that the recent rise in bank stocks, fueled partly by positive financial forecasts by Bank of America Corp., Citigroup Inc. and JP Morgan Chase & Co. earlier this year, is setting investors up for a fall. Much of the resurgence in these shares stems from new growth in fixed income trading, while only a few regional banks have such platforms.
Stocks may slide once investors begin to see how the plan shakes out, Townsend said. Still, in the near term bank stocks, which some analysts say remain oversold, could remain in an upward trend.
"We've developed some positive momentum in March that is likely to take us farther," Townsend said. "But then first-quarter earnings will hit, and it's going to be poor."
Theodore Kovaleff, the president of Informed Sources Service Group in New York, said investors can expect more "bad surprises" from banks once they report their first-quarter results next month. These could include institutions reporting additional large losses on residential construction and development loans, unexpected spikes in card delinquencies and increased chargeoffs in other loan categories.
"If XYZ Bank comes out with a horror show, that's going to impact all the way across the sector," Kovaleff said. "My prediction is that it's going to be a very slow and arduous climb."
Kovaleff said he believes the market will face pressure for some time because the government is vastly increasing its debt to fund the recently enacted economic stimulus package and the Obama administration's budget. "The cost of debt is not something that is helpful to the economy," Kovaleff said.
But Monday's bank stock rally went across the board.
JPMorgan Chase & Co. rose 24.7%; Bank of America Corp. 26%; Citigroup Inc. 51 cents, to $3.13; Wells Fargo & Co. 23.9%; U.S. Bancorp 19.2%; Bank of New York Mellon Corp. 16.5%, and State Street Corp. 21.4%.
Among the regionals, PNC Financial Services Group Inc. was up 21.6%; SunTrust Banks Inc. 17.1%; M&T Bank Corp. 21.1%; KeyCorp 22.4%; Comerica Inc. 15.5%; City National Corp 17%; Bank of Hawaii Corp. 9.6%; Regions Financial Corp. 48 cents, to $4.50, and Fifth Third Bancorp 25 cents, to $2.38.