Bank stocks rose slightly Monday, but concerns about loan quality caused the sector to underperform the market, which benefited from signs that credit markets are beginning to reopen.
The KBW Bank Index inched up 0.54%. The Dow Jones industrial average jumped 4.67%, and the Standard & Poor's 500 gained 4.77%. Among the signs of a credit thaw: The three-month Treasury bill yield ended the day above 1% for the first time since mid-September, and the London interbank offered rate for three-month dollar loans fell 36 basis points, to 4.06%.
There were further warnings that the economy is likely to remain in a prolonged slump. Fitch Inc. forecast that home prices could fall another 10% before stabilizing in 2010, adding to their 22% decline in the past two years.
Federal Reserve Board Chairman Ben Bernanke warned in testimony before the House Budget Committee that the economy is likely to be "weak for several quarters, and with some risk of a protracted slowdown." He urged lawmakers to consider a second economic stimulus package.
Tim Curran, a bank stock trader at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said the sector continued to lag because the credit thaw is shifting attention to loan quality and upcoming earnings reports.
Bank investors are still leery about fundamentals, since many companies have yet to report third-quarter results, Mr. Curran said in an interview Monday.
"Financials definitely lagged … especially among the superregionals," he said. "People are trying to look ahead to earnings to separate some of the quality names."
Large banking companies such as Bank of America Corp., which rose 5%, and Citigroup Inc., which gained 1.4%, are getting renewed interest, Mr. Curran said, while KeyCorp, which fell 3.4%, Comerica Inc., which fell 4.3%, and National City Corp., which fell 2.7%, are among those making investors nervous.
"There are still plenty of headwinds … and there are plenty of assets other than mortgages that will have issues," he said.
Andrea Jao, a Barclays Capital analyst, wrote in a note to clients that she expects a weaker operating environment and higher credit costs to suppress the results for small regional firms. She advised clients to seek out companies with high loan-loss reserves and high capital ratios, among other things.
UnionBanCal Corp. rose 0.1% after reporting that third-quarter profits fell 18% from a year earlier, to $104.8 million. The San Francisco company's provision for loan losses grew tenfold, to $117 million.
Synovus Financial Corp. shares fell 12.5%. Greg Ketron, a Citigroup Inc. analyst, lowered his full-year earnings estimate for the Columbus, Ga., company by 9 cents, to 34 cents a share, since he expects credit issues to spread beyond residential construction. Synovus is scheduled to report third-quarter earnings Thursday.