Tuesday, May 15, 2012

Doug Kass - Banks Are Down but Not Out

For the reasons listed below, we are probably at or are approaching an important buying juncture in bank stocks.

  • Short-term fundamentals: Apart from JPMorgan's one-off loss, banking industry profits are currently being pressured by historically low interest rates. As most subscribers recognize by now, I am of the view that interest rates are at cyclical lows. As a result, net interest margins are likely close to their nadir. Banking industry profits have also been pressured by an unprecedented 35% decline in nationwide home prices and by reduced sales activity. Here, too, I believe that we are at a cyclical low point and that a durable and multiyear recovery that continues throughout the decade is likely. As well, banking industry profits have been reduced by lower capital markets activity. Since I am expecting a huge reallocation out of bonds and into stocks, the capital markets may go from headwind to tailwind. Finally, industry profits are still being pressured by the residue of poor credit allocation decisions (and large credit losses) from the pre-2009 period. Credit quality has been on the mend for a few years, however, and the move toward normalization of loan losses is already upon us. That normalization moves us ever closer to the banking industry achieving its potential earnings power.
Read it at The Street.com
Banks Are Down but Not Out
By Doug Kass
(h/t Abnormal Returns) 

For those who have been following this blog you’ll recognize that I disagree with much of this outlook. In my opinion, interest rates and home prices are likely to continue the trend lower in the next couple years as the private sector (primarily households) continues to reduce leverage. That being said, Kass has far more experience than I and it’s always important to read/keep in mind views that contrast your own.

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