With the mid- and small-cap bank stocks up 20% over the prior 3 months vs. 4% forthe S&P 500, while we believe the market is accurately pricing in improved credittrends for banks in 1Q10, as well as FY2010, we also see strong price appreciation asforging an anchor on additional upside from current valuations in the remainder of2010. Consequently, we see a leadership change in 2H10 from "credit only"-typestocks passing the baton to stocks of banks able to create additional dollars of earningsoutside of pure credit improvement. While we look for a decent 1Q10, we believethese positive trends are now reflected in the valuations. Notably, P/TBV multipleimprovement post the March 2009 trough is running over 2x as fast as improvementfrom the October 1990 trough, implying that the sector may be ripe for taking a stepback before it continues a longer-term forward advance back to historical multiples. [JP Morgan]
U.S. Mid- and Small-Cap Banks
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