A late-day bounce in the largest exchange traded fund for U.S. banks wasn’t enough to pull the ETF into positive territory on Tuesday. Some analysts expect bank stocks such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) to continue to underperform in the near term even though investor expectations have been scaled back since the first quarter.

“Specifically, we need to see housing values stabilize, if not edge higher, as a means to foster accelerating employment and increasing capital spending to allow for more meaningful loan growth and higher GDP (+4%)—which continues to suggest a 2012 event at the earliest, in our view,” wrote Sterne Agee analysts Todd Hagerman and Robert Greene in a note Tuesday.

The $1.5 billion SPDR KBW Bank ETF (NYSEArca: KBE) was down nearly 6% for 2011 heading into Tuesday’s session.

Bank stocks as a group “are simply not cheap enough to attract new money flows back to the sector given the broader headwinds,” such as an elusive growth outlook and increasing expectations for higher capital levels, Sterne Agee said.

“Given the multitude of headwinds facing the sector, it is becoming increasingly clear that valuations alone are not enough to support the stocks with further downside possible as the sector potentially looks to retrace 2010 lows … when similar fears (capital uncertainty, punitive regulatory climate, potential for double dip recession) pressured the stocks lower,” the analysts wrote.


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