Spike in financial stocks stirs hopes for big banks

But too many unknowns make the sector a dicey bet for investors

Apr 19, 2009 @ 12:01 am

By Sue Asci

Financial stocks have made a remarkable comeback in the past month, leaving advisers to make a hard call: Are banks regaining their health after the yearlong shellacking that they have endured?

Financial-sector mutual funds, which track the industry, posted an average gain of 48.71% for the one-month period ended April 10, compared with a decline of 43.91% last year, according to Chicago-based Morningstar Inc.

The sector funds, meanwhile, outperformed the Standard & Poor's 500 stock index, which had a 19.29% return.

The dramatic turnaround has financial advisers and analysts divided on how to proceed.

"I think you'll need at least two months to judge the health of the sector," said Jeff Tjornehoj, Denver-based senior research analyst at Lipper Inc. of New York.

"We want to see more earnings numbers and numbers of loan losses and write-downs," he said. "That will give us a better idea of the health of the banking industry."

Banks are a key factor in financial-sector funds, constituting up to 30% of allocations. Most sector funds also include holdings in insurance carriers, asset management firms and other financial services providers.

Many experts are leery about the sudden upsurge.

"Last month was stock-specific news," said Harry Milling, a Morningstar mutual fund analyst. "It won't make a difference long-term. It's not sustainable. Certainly, portfolio managers have reason to be optimistic. That said, no matter what happens, financial-sector funds will be much more volatile than large-blend funds."

Hold off on financials, advises Gordon Bernhardt, president of Bernhardt Wealth Management Inc. of McLean, Va., which manages $95 million in assets.

"I don't advise people to be speculative — there is still a lot of uncertainty there," he said.

That sentiment was echoed by Matthew Illian, a wealth manager at Marotta Wealth Management of Richmond, Va.

"There is still a lot that can happen, particularly with the government's stress-testing of leading banks. Banks and financials own mortgage-backed and real-estate-backed investments that can go down in value," said Mr. Illian, who said he continues to underweight financials.

Marotta has $120 million in assets under management.

Some observers, however, are heartened by reports of better-than-expected earnings for banks: San Francisco-based Wells Fargo & Co. reported a record $3 billion in profit for the first quarter, and a clutch of other major banks also beat first-quarter Street expectations.

The worry over the fate of major banks is abating, Mr. Tjornehoj said.

Others agree, with caveats.

"There have been some positive developments and, hopefully, some light at the end of the tunnel in terms of the credit crisis," Mr. Milling said, though he warned that "people should not buy funds based on one month's performance."

Government programs are also having a positive impact, "but the turnaround is not based on fundamentals," he said.


Still, at least one analyst is bullish on the long-term prospects of bank stocks.

"I think overall, you're going to see the market climb and see these stocks climb because they're not in the type of trouble that had been projected," said Richard Bove, a bank analyst with Rochdale Securities LLC of Stamford, Conn.

Some signs that the recent rally has legs include an increase in bank deposits in the past quarter, he said.

"And the costs of those deposits are plummeting," Mr. Bove said.

"There is a refinance boom under way. Interest rates have come down, and that increases securities values, Mr. Bove said.

"Write-offs won't be taken, and the banks have cut back costs dramatically," he said. If you net it all out, there should be a profit."

Some of Mr. Bove's financial-stock picks include Bank of America Corp., The Bank of New York Mellon Corp., JPMorgan Chase & Co., PNC Financial Financial Services Group, State Street Corp., U.S. Bancorp and Wells Fargo.

That is good news for investors who have already bought in.

Most of Cary Carbonaro's clients stayed out of financials last year, but in January, she advised them to buy.

"I think my clients were nervous, but we said it was a sector that's going to lead us out of the recession, and you have to have some exposure," said Ms. Carbonaro, who is president of Family Financial Research LLC of Huntington, N.Y., which manages $30 million in assets.

Many of her clients are purchasing individual stocks, including those of banks and insurance companies, or finance-sector exchange traded funds, she said.

Other advisers are using dollar cost averaging and are recommending a mutual fund or an ETF.

"I would be dollar-cost-averaging into one or two of these [sector] funds or a couple of ETFs," said Scott Kays, president of Kays Financial Advisory Corp. of Atlanta, which has $120 million in assets under management.

"I would definitely do it through a fund, rather than trying to pick the best bank out there," he said. "I would not want to dump a big amount of money into it."

Joseph Alexopolous, a principal of Aequitas Wealth Management LLC of Los Angeles, is cautiously optimistic.

"It very well might be the time to invest in financials, but my advice is to be half right and buy half of what you are thinking of investing," said Mr. Alexopolous, whose firm manages $26 million in assets.

"We don't know what kind of additional regulations the government is going to come up with for [the Troubled Asset Relief Program], what new regulatory bodies they are forming and how it will affect the banking industry," he said.

E-mail Sue Asci at sasci@investmentnews.com.


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