Banks: 'still peeling back the onion'

Some Banks (Yes, Banks) May Be Back in Favor

Excerpt:

But how safe are big investment banks that stand knee-deep in the securitized mortgage crisis? Determined to avert a bank failure that could reverberate through the economy, the Fed has made available hundreds of billions of dollars — which may eventually come out of taxpayer pockets — in low-interest loans. Many big banks also benefited last week from a capital infusion as a result of the shares they were able to sell in the $18 billion initial public offering of Visa. Can investors now safely assume that the fever has broken?

Not quite, Mr. Ellison said. “The earnings prospects are still declining,” he said. “And loan growth won’t be there.”

He and other skeptics wonder whether more nasty surprises are to emerge from balance sheets. “Full disclosure only happens when things are good,” Mr. Ellison said. “Even now, we’re still peeling back the onion.”

But Richard Bove, a financial strategist at Punk, Ziegel & Company who was among the first to lower ratings on the banks last summer, now says he thinks the selling has gone too far. “ I personally believe that investors should dramatically overweight their portfolios with bank stocks,” he said.

Assets have been devalued and earnings reduced, but most banks — even those like Citigroup and Bank of America that have taken large write-offs — still have positive cash flow, he said.

Going strictly by the numbers, Derek Rollingson, manager of the quantitative ICON Financial fund, concludes that financial stocks are trading at 45 percent less than true value. “We’ve priced in all the bad news,” he said. “Has the market overreacted to the news? In the case of the financials, we would say yes.”

Comment: Wells Fargo announces earnings next Wednesday.