Friday, April 9, 2010

Financials Update $BAC $MS $GS $STT $XLF

· Financials Update for the week – there was some expectation that the financials, esp. the banks, would cool their rapid advance as Q1 came to an end; however, this hasn’t happened and the group has continued its very strong march higher. The banks are up ~5% on the week and are up ~29% YTD. After posting the best performance of any major group in Q1, buyers continued to allocate to the group ahead of the kick-off to earnings season. There weren’t many specific catalysts for the rally, but rather a confluence of events. There is a bit of performance anxiety in the group, as the space remains relatively underowned and gains have been so strong. The desk noted that some larger MFs are starting to increase their allocations. There were a couple of bullish articles written this week on the state of commercial real estate (focusing on multi-family and office; retail still seems to be struggling), which has helped provide a bid to the smaller regional banks (keep in mind that a lot of the CRE exposure is concentrated in the regional banks). There has been a dramatic rally in the MI/financial guarantor space, reflecting the recent mortgage mod announcements (BoA, Treasury) and general optimism around resi real estate. ABK posted earnings Thurs night and the stock saw a dramatic short squeeze on Fri (recall the co delayed its earnings a few weeks back and warned of a potential bankruptcy filing). On the regulatory front, the smaller/mid-cap regional banks are viewed as having less exposure to any new rules that may come out of Washington (the most intense focus has been on activity in investment banks).
Sell-side previews heading into earnings have generally been upbeat when it comes to fundamentals (further improvement on credit; NIMs stable-to-higher; loan demand still weak) although a few firms made cautious comments when it came to valuation. The “lower quality” regional banks have seen the sharpest moves higher, as investors are most interested in the credit-improvement component of the bank story (instead of loan demand, rising NIMs, investment banking, etc). The “safer haven” regionals (like PBCT, HCBK) have been relative laggards as they are perceived as having less leverage to improving credit (also – one of the biggest positives for the “strong credit banks” has been the prospect for very accretive FDIC deals although in recent weeks FDIC officials have signaled that they may not be as generous on deals going forward). The larger money centers have also caught a bid, but again credit is driving a lot of the buying. For IB activity, sell-side previews have generally been on the neutral/cautious side owing to reduced client activity (UBS’ upside FI numbers for the Mar Q, reported a couple weeks back on Bloomberg, were seen as being more co-specific than an industry-wide phenomenon). There continues to be noise coming out of Washington and when Congress comes back into session this week expect more headlines. For the most part, the biggest changes would impact IBs more than traditional banking (the big development this week was an SEC proposal that would force banks to retain a ~5% economic unhedged interest in any underlying securitization; Fannie and Freddy would be exempt from this rule).
· Financials – to watch for the week coming up – as for most sectors, the big focus will be on earnings. JPM starts things off on Wed, PBCT comes Thurs night, and BAC is Fri morning. Away from earnings, the credit card master trust #s will be hitting throughout trading on Thurs. Also on Thurs, we could hear more news around the White House’s plan for revamping Fannie and Freddie.
· Regional bank earnings preview – from JPMorgan’s Steven Alexopoulos – published Apr 9 - we see a leadership change in 2H10 from “credit only”-type stocks passing the baton to stocks of banks able to create additional dollars of earnings outside of pure credit improvement. While we look for a decent 1Q10, we believe these positive trends are now reflected in the valuations. Notably, P/TBV multiple improvement post the March 2009 trough is running over 2x as fast as improvement from the October 1990 trough, implying that the sector may be ripe for taking a step back before it continues a longer-term forward advance back to historical multiples. With the majority of stocks now trading at nearly 11x normalized EPS, we believe improved credit trends are now baked into the valuations and that “credit only” stories appear fairly priced. The two areas that we believe offer investors the opportunity to own shares in banks that could drive incremental earnings surprises are: (1) banks that are strategically positioned to lever excess capital, such as SIVB, CMA, CYN, and CFR, and (2) banks positioned to take new deposits, which we view as earnings fuel, at historically low costs in FDIC deals, such as MBFI, FMER, UMPQ, and PBCT
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