Although CIT Group Inc.'s impending Chapter 11 bankruptcy is unlikely to halt the renewed popularity of financial sector stocks, advisers remain leery of investing in banks and other lenders.
“We're going to see more difficulty in the regional bank sector, especially with those who have had exposure to commercial loans,” said Marc Henn, president of Harvest Financial Advisors LLC, which manages $220 million.
The problems will come from recession-strained borrowers who are unable to repay existing debts, he said.
Bank sector stocks have re-bounded from their March lows, with the Keefe Bruyette & Woods Inc. bank sector index (BKX) rising from an intraday low of 17.75 on March 6 to 41.71 on Nov. 4 — a gain of 125%.
“I would say that the rally isn't supported by financials, so it must be supported by emotions. It's too risky a sector to put a bet on as either a bond or equity holder,” said Troy Daum, principal at Wealth Analytics Inc., which manages $62 million.
“As far as having financial services companies in our portfolio, it's more appropriate for risky strategies, but not in our core portfolios,” said James Holtzman, adviser at Legend Financial Advisors Inc., which manages $350 million. “Whether it's commercial or personal lending, it doesn't seem to be getting any better.”
Although word of CIT's distress earlier this year raised fears of a credit crunch for small-business borrowers, its prepackaged bankruptcy filing — set for Dec. 8 in New York — is now expected to cause few systemic problems.
“It's decent-sized with about $71 billion in assets, but even a regional bank like PNC [Financial Services Group Inc.] has about $271 billion in total assets,” said Sean Egan, managing director of Egan Jones Ratings Cos.
“As a finance firm, CIT is about one-tenth the size of GE Capital,” he said. “It's not large enough to be systemically dangerous.”
None of CIT's operating companies, including CIT Bank, are included in the bankruptcy filing.
CIT chief executive Jeffrey M. Peek, who has announced plans to step down at the end of the year, has said that CIT's reorganization plan will permit it to continue lending to small-business customers. Many of these customers, however, have already migrated to regional banks and other lenders, said Morningstar Inc. stock analyst Jim Sinegal.
“I don't think you can read too much into the general economy from [CIT's problems],” he said. “With CIT, a lot of it was bad lending and a business model that wasn't feasible.”
E-mail Darla Mercado at [email protected].
