Regional bank stock prices should remain consistent in the wake of last weeks terrorist attacks, but banks will see slower earnings growth, and credit quality will continue to deteriorate, analysts said.
I see banks performing at least as well as the broader market, said Fred Cummings, an analyst at McDonald Investments in Cleveland. I think they can sustain growth.
Before the attacks that shut down Wall Street for the better part of a week, analysts had estimated that banks average earnings per share would grow 10% to 12% next year. Now, Mr. Cummings and his colleagues have reduced their estimates to 8% to 10%, he said.
Bank stocks rebounded somewhat Tuesday. In late afternoon trading, the S&P Bank index was up 1.1%, and the Dow Jones Industrial Average 0.3%, but the Nasdaq was down 0.7% and the S&P 500 about 0.2%.
Among the big financial companies, American Express Co. was down again, falling nearly 10%, to $27.25, and J.P. Morgan Chase & Co. was off about 1%, to $34.90, Citigroup Inc. was off just a bit, holding near its opening level of $39.60 through much of the session. Wells Fargo & Co. was up 0.4%, at $43.67.
Thrifts continued to outperform both their banking peers and the broad market. In late afternoon activity, Washington Mutual Inc. was up more than 3%, to $38.24, extending its Monday gains, and Astoria Financial Corp was up 1.5%, to $58.90, also adding to its advance on Monday.
Analysts agreed that the Federal Reserves decision to cut interest rates by half a percentage point was good for bank stocks. It was a necessity, said Matt Snowling, an analyst at Friedman Billings Ramsey & Co. in Arlington, Va. It had to be done to provide liquidity and reassure the capital markets. (See related story, page 1.)
Still, credit quality, already a concern at many regional banks, is likely to worsen before it gets better.
The economic slowdown will clearly hurt credit quality, Mr. Cummings said. You hope to particularly offset it with some margin expansion, but you cant really get out of the way.
We may have a quarter or two that is soft, added Mr. Snowling. They take their hit and move on. The market understands this. The industry should hold up fairly well.
Some banking companies stocks could prove especially attractive during the market downturn, Mr. Cummings said. Among his picks is Fifth Third Bancorp of Cincinnati. Its stock is down more than 14% from its 52-week high it was trading at $55.48 late Tuesday, up nearly 4% from Mondays close yet he is predicting that earnings will grow 14% to 15% this year. He is also bullish on Charter One Financial Inc. of Cleveland. Its stock was trading at $26.88, up 0.6% from Mondays close but still well below its 52-week high of $31.41.