Bank stocks’ gains driven by strengthening housing market

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Tough regulators in the U.S. and the recent crisis in distant Cyprus could make investors wary about the financial sector. Yet U.S. bank stocks continue to hold opportunities for investors as the nation’s housing market improves, analysts say.

“We’re more enthusiastic about credit quality, and part of that is from the housing industry,” said Ken Crawford, senior portfolio manager of Clayton-based Argent Capital Management. “Housing prices are stabilizing, and that’s good for banks. Additionally, banks are seeing loan growth from both consumers and commercial and industrial loans for businesses.”

Another positive trend for bank stocks is a return to dividends. During the economic downturn, many banks cut dividends, to the ire of investors. Now many banks are returning to dividends and share repurchases.

“That’s a longer term potential improvement,” Crawford said. “They’re not giving them back as much as they used to, but in the next two to three years, as long as the economy is going OK, we’ll see more share repurchases and dividends.”

Excluding real estate-related stocks, financial stock returns in the S&P 1500 Financials index are up 12.5 percent so far this year, beating the overall market performance of 10.2 percent.

Small- and mid-cap banks have shown the biggest gains among small/mid-cap, regional and universal banks, with a 13 percent increase, followed by big banks’ 10 percent and regional banks trailing at 7.5 percent, according to New York-based investment bank and research firm KBW.

“Bank stocks have been leading the markets last year and again this year,” said Frederick Cannon, KBW’s director of research. “In general, with the housing market rebounding, people are feeling better about them.”

Investor confidence in bank stocks had been on the upswing following the economic downturn. But the temporary shutdown of banks in Cyprus in recent weeks renewed jitters about Europe’s debt crisis. Cyprus’ banks reopened Thursday, steadying global markets.

“The real challenge is for the larger U.S. banks — Citi, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of America — is through the derivatives markets, and how they’re tied in to what happens globally,” Cannon said.

Cannon also expressed caution on bank stocks’ ability to continue the strong performance they’ve experienced. “(Banks’) balance sheets have recovered and capital levels are high,” he said.

“But on the other hand, earnings are still under pressure and there’s increasing competition for mortgage loans, and that’s putting downward pressure on revenue.”

Still, bank stocks remain attractively valued, said Kate Warne, principal and investment strategist at Edward Jones in Des Peres. “Many of them are trading below book value, which usually is an indication that they’re cheap. They’re also trading at low price-to-earnings ratios.”

Warne sees opportunities in regional banks that are well diversified.

“Regional banks look very attractive because the U.S. economy is stronger than the rest of the world,” Warne said. “One of the things we saw in the Great Recession is that some banks weren’t diversified. We continue to like those that are better diversified, both geographically and in their lines of businesses.”

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