A bounce in banking stocks late last week has investors and analysts hoping that the sector has been beaten up enough in recent months to stage a recovery.
Financial Select Sector SPDR Fund (NYSEArca: XLF) saw early gains evaporate on Monday. The exchange traded fund’s top bank holdings JP Morgan (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Bank of America (NYSE: BAC) were all in positive territory, however.
Bank stocks have underperformed the broader market so far this year after their recent high in mid-February.
“This reflects recently increased regulatory uncertainty (especially regarding required capital levels), weakening economic data, sluggish capital markets and in general little hope for a meaningful pickup in revenue anytime soon. The lack of M&A activity among banks hasn’t helped,” Deutsche Bank analysts wrote in a recent report on the sector.
Yet cheap valuations after the sell-off could make banks attractive to some investors.
“One could argue that as long as the economy doesn’t double dip (which we don’t think will occur) and that the bulk of regulatory surprises are behind us (a big if), a lot of bad news has been priced in—and that from here, data points may not be as bad as feared and bank stocks should rally,” Deutsche Bank said.
Still, other analysts say investors hoping M&A activity will lift banks this year will end up disappointed.
“Predictions of accelerating industry consolidation have failed to materialize thus far as the economic recovery has proved painfully slow and capital requirements remain uncertain. Fair value accounting, uncertain capital and earnings, and irrational expectations on the part of sellers continue to stall consolidation activity—at least for now,” Sterne Agee analysts said in a June 9 research note.
“Depressed valuations, director/management fatigue, persistently weak fundamentals and high compliance costs will likely spark a return to traditional M&A in 2012—not too dissimilar from past cycles,” they wrote. “However, we believe pricing will stay more rational and acquisition activity will likely trend toward the smaller end of the spectrum, at least initially.”
Financial Select Sector SPDR Fund
