Bank stocks rose Friday as the earnings season wound down and the government provided detail on how it conducted its stress tests of the country's 19 largest banking companies.
The KBW Bank Index rose 2.89% but ended the week down 7.1% as many banking companies reported that credit deterioration had spread into further sectors, including commercial real estate and commercial and industrial loans.
Still, investors were encouraged by several positive first-quarter trends at banks, said Frank Barkocy, the director of research at Mendon Capital Advisors. "Mortgage refinancing activity was strong, and margins started to show improvement in February, so many of the institutions should see margin expansion in coming quarters," he said.
Investors also reacted positively to the Federal Reserve's afternoon release of the methodology used in its stress tests and its assertion that "most banks currently have capital levels well in excess of the amounts needed to be well capitalized."
Investors will probably have to digest "myriad" rumors next week about which banking companies may be required to raise additional capital in view of the stress tests results, Barkocy said. "I would think that would cause a choppy performance within the group, particularly among the larger names, until we see more definitive answers on the stress tests."
The government is expected to release the stress test results to the public on May 4.
Eugenio J. Aleman, a senior economist at Wells Fargo & Co., wrote in a note Friday that politicians are "overreaching their regulatory boundaries" and blurring the boundary between the political system and the economic system. Investors will not return to the market until they are "guaranteed that the rules of the game are clear," he said.
Aleman also questioned the prudence of allowing "politicians" — not the markets — to determine economic winners and the losers.
"How can we expect private capital to fund the recapitalization of the banks, which is the only way the economy is going to start growing again, if political decision-makers are the ones behind the success or failure of these firms?" Aleman wrote.
Gainers included JPMorgan Chase & Co., up 0.5%; Bank of America Corp., 3.2%; Wells Fargo & Co., 6.5%, and U.S. Bancorp, 3.3%.
Citigroup Inc. fell a penny, to $3.19.
Among the regional banking companies, PNC Financial Services Group Inc. rose 5.6%; KeyCorp, 14%; SunTrust Banks Inc., 7.2%; Zions Bancorp., 12.5%, and Comerica Inc., 4.8%.
Shares of City National Corp. rose 9.2%, after the Los Angeles company posted better-than-expected first-quarter results. Net income after paying preferred dividends fell 96% from a year earlier, to $2 million, or 4 cents a share. Excluding a one-time, $11.2 million charge for securities losses, net income was 27 cents a share; analysts on average were expecting 22 cents. The company also cut its dividend 60%, to 10 cents.
Wilmington Trust Corp.'s stock soared 31.8% as the Wilmington, Del., company beat analysts' estimates. Wilmington said that its net income after paying preferred dividends fell 57% from a year earlier, to $17.7 million, or 26 cents a share. Excluding writedowns and a one-time, $7.6 million gain in its investment portfolio, net income was 19 cents a share — 15 cents better than the average of analysts' estimates.
Marshall & Ilsley Corp. fell 4.3%. On Thursday, the Milwaukee company reported a first-quarter net loss of $116.9 million, or 44 cents a share, as higher loan losses and credit costs diluted its earnings. Analysts on average had expected a loss of 33 cents a share. A year earlier, M&I earned $46.2 million, or 56 cents a share.
The Dow Jones industrial average rose 1.5%, and the Standard & Poor's 500 index 1.68%.