By early last month some on Wall Street were ready to call a bottom on bank stocks, but dismal news has continued to pound the sector, bringing skeptics back to the forefront.
Beyond expectations of a bloody fourth-quarter earnings season, signs of a deepening recession and lofty commercial loan losses could further depress financial stocks through the first half of this year, many traders and analysts say.
"I can't help but be bearish. I don't see how people can say with any certainty that we're at the bottom yet — or necessarily even near it yet," Tim Curran, a bank stock trader at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said in an interview last week. "This overall downward trend we've been on could last well into '09, as much as I hate to say it."
The KBW Bank Index lost nearly 50% of its value last year.
Of particular concern for Mr. Curran and others is the possibility that the battered economy will manifest itself in the form of whopping commercial mortgage losses.
Foresight Analytics LLC, a research firm in Oakland, Calif., estimates that $160 billion of commercial mortgages will mature in the next 12 months, and analysts caution that the majority of the developers who owe money on those loans could find refinancing a struggle. Bankers could suffer by extension, because they could wind up owning massive, unfinished projects if borrowers cannot afford the rising rates and end up defaulting.
Gerard S. Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview last week that anyone who hoped the banking system's woes would be largely confined to the housing slump — and related issues — will have their hopes dashed this year.
Commercial mortgage and corporate loan losses, coupled with the expectation of mounting consumer delinquencies on credit cards and auto loans as unemployment rises, could cause pain for the banking sector throughout the year, he said. "The banking industry is far from out of the woods."
Stocks typically rebound roughly six months ahead of an economic recovery, Mr. Cassidy said, but now he and others expect most or all of this year to be grim for banking companies, pushing back any sustained rally in financials until at least the second half.
"We see it being acutely bad in the first six months of '09," he said. Not all market observers are as pessimistic. James Paulsen, chief investment strategist of Wells Fargo & Co.'s Wells Capital Management, told reporters on a conference call last week that the ongoing impact of government stimulus programs and eventually pent-up consumer demand could lead to a turnaround before midyear, helped by "the consumer who waited to buy a car and is definitely going to need one."
The third quarter could be "better than expected" by many on Wall Street, Mr. Paulsen said. "It's like you're at a cookout, and you're trying and trying to get your charcoal going, and you keep squirting on lighter fluid, and all of a sudden it goes 'Poof!' "
But others say the carnage caused by the battered housing market has yet to subside, suggesting that residential mortgage woes will remain a thorn in bankers' side at a time when broader economic pressures will weigh heavily on their balance sheets.
The S&P/Case-Shiller index released Tuesday showed that October home prices in 20 U.S. cities fell 18% from a year earlier — the fastest rate on record — as a result of rising foreclosures and slumping sales.
According to the National Association of Realtors, existing home resales fell 8.6% in November from the previous month, and the median sales price plunged 13.2% from a year earlier — the biggest drop on record — to $181,000. And the Commerce Department said new home sales fell 2.9% from a month earlier; that drop was the fourth in as many months.
In addition, job losses are expected to pile up this year. Scott A. Anderson, senior economist at Wells Fargo, predicted in a report last month that employers will shed 3.7 million jobs over the next 12 months. These cuts would push the 2008-09 total to about 5.5 million, double the figure for the last prolonged recession in 1981-82, he said.
Mr. Anderson expects the unemployment rate to rise to 8.8% by the end of this year and to average 8.2% for the year.
Many analysts say such grim statistics will continue to produce troubling headlines and batter investors' confidence — and could weigh down stocks for several more months.
"The only things falling faster than the prices of financial stocks are [banks'] forward earnings estimates," Jack A. Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank, wrote in a December report to clients. "We recommend that investors remain spectators here."
