While bank stocks were down Monday, the sector's performance is generally faring better than expected through third-quarter earnings.
"The bleeding has generally been light, and there have not been a lot of sellers — most people are holding their positions with the expectation that bank stocks are going to go higher," Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said in an interview Monday.
"Most banks are meeting or beating Street estimates, with notable margin expansion and a deceleration in credit-quality deterioration," Raymond James & Associates analyst Anthony Polini wrote in a note Monday. "Although there are certainly pockets of relatively weak performance, the light at the end of the tunnel appears to be getting brighter."
In the next few months, bank stocks could continue to hold their own or trade higher if the economy shows further signs of a true recovery and the peak for credit losses comes into view. However, a wild card threatening the sector is uncertainty over government policy.
Indeed, on Monday the KBW Bank Index fell 4.09%, in large part because of an assertion by Rochdale Securities analyst Richard Bove in a note Friday that Bank of America Corp. would have to sell $45 billion in a new capital offering before the government would let it redeem its preferred shares from the Troubled Asset Relief Program. B of A's shares fell 5.1%, to $15.40.
"There has been uneasiness with some of the regulatory pronouncements of late — whether it pertains to compensation, the Tarp payback or, in the case of Bank of America, whether they'd have to go to the market again in order to repay Tarp, and that's created some uncertainty for the group overall," said Frank Barkocy, the director of research at Mendon Capital Advisors.
This week could be a choppy one for bank stocks as smaller banking companies report earnings and investors take profitson recent price gains. (PNC's shares fell 3.2%, to $50.71, on Monday after a big jump on Friday.) Analysts "sell" recommendations are also having an impact. (Synovus Financial Corp. was the latest victim Monday and its stock fell 43 cents a share, to $2.49.)
"It seems like we've been taking two steps forward, then one step backward," Polini said.
James Bradshaw, an analyst at Bridge City Capital LLC in Portland, Ore., said that investors should be able to get more clarity on credit issues and revenue generation after a spate of presentations by banking companies at investor conferences in November. Stock prices could move up if encouraging news emerges at those conferences or if companies announce recapitalizations.
"Even though recapitalizations are dilutive to existing shareholders, they are generally viewed as a positive if the companies are able to get capital," Bradshaw said.
Polini said he remains bullish on the sector for the long term because numerous stocks still trade below book value and the average price-to-book ratio is only 118%, compared to a "normalized" average of 150%.
"We believe the rally in bank stocks still has a long way to go," Polini said. The KBW Bank Index "has only partially recovered from the painful free fall experienced early this year when fear ran rampant and short sellers took delight in harsh economic data and government intervention."
The index would have to more than double from its current level just to trade near the values it established two years ago, Polini added.