5 Reasons Why Bank Stocks Have Not Bottomed


Merrill Lynch says that they (ML) are through the worst of the credit crisis.

RBC Capital Markets believes that whether that is the case or not, Bank stocks remain attractive. Here are RBC’s 5 reasons why bank stocks have not reached the bottom:

5 Reasons Why Bank Stocks Have Not Bottomed

1) Bank Stock Valuations Are Still Excessive:
• Current stock valuations of the Top 50 banks relative to historical valuations, remain expensive — even with the recent poor performance.

• The Top 50 banks’ forward 12-month P/E ratio stands at 13.2x, which is roughly one standard deviation above the mean (25-year avg of 10.9x).

• During the trough of the last two bank stock bear markets, 1990-91 and 2000-01, P/E ratios for the top 50 banks declined to 5.7x and 10.1x, respectively.

2) Recessionary Forces Will Lead To Bigger Credit Quality Problems:
• In prior recessionary periods, credit problems typically followed as a result of the weakening economy. We believe the U.S. economy is currently facing recessionary pressures that will only worsen extending into 2009.

3) Exposure to Riskiest Loan Areas Remains Extreme:
• Construction, Commercial Real Estate (CRE) and leveraged loans have provided steady growth over the past few years. Commercial loans outstanding for the US banking industry grew 64% from 2004 to 2007 due to demand from the syndicated loan market, in our opinion. As the economy weakens further in 2008, the underlying fundamental strength in commercial real estate and industrial America will soften leading to higher defaults in poorly underwritten CRE and leveraged loans.

4) Loan Loss Reserves Are Too Low:
• Bank management teams will often claim loan loss reserve adequacy only to boost reserves in subsequent quarters. We have adopted the Eyles Test (ET) for loan loss reserve strength. Banks should build and maintain reserves that will ensure survival during the down leg of the credit cycle.

5) Credit Problems Are Not Likely To Peak Until 2009:
• Given our belief that CRE, construction and leveraged loan portfolios have significant room to weaken in 2008, we believe credit problems will not reach their peak until sometime 2009.

Nice work . . .


Commercial Banks – Has The Hurricane Passed Or Are We In The Eye Of The Storm?
Gerard Cassidy, Jake Civiello
RBC Capital Markets, APRIL 3, 2008

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What's been said:

Discussions found on the web:
  1. foo commented on Apr 7

    So what do they say about the Canadian banks?

  2. mhm commented on Apr 7

    If you have experience with the old Pitfall video game you are qualified to play Banks/iBanks.

    OT, for those trading Latin markets, just be aware of political turmoil going forward…

  3. doc1 commented on Apr 7

    Good find Barry, but did you mean to say “RBC Capital Markets believes that whether that is the case or not, Bank stocks remain attractive.” or that these stocks “remain UNattractive.”?

    I agree with the assessment by RBC — it’s what my gut and observations have been telling me since January — been heavy into SKF since then. Thanks for some reason and sanity in an otherwise crazy market.

  4. michael schumacher commented on Apr 7


    Don’t tell that to the propped up baking sector.

    This market is out of the hands of the sane…

    Totally ridiculous…..


    How come your collective industry will not grow a pair and actually call this out for what it is: massive fraud on a scale never seen before. Instead of shrugging your shoulders and making some quick bucks how about calling it out and trying to limit the damage we ALL will suffer if the current practice of “growth regardless of cost” is not exposed and stopped.

    Free market left the building years ago, using that as an excuse to be apathetic about it is being part of the problem.


  5. brasil commented on Apr 7

    How can bank stocks be attractive …with that analysis..seems not to make sense..other than they have been severely oversold and the FED govt is willing to keep them propped up..they don’t look cheap..and earnings don’t look to hold up..

  6. Ross commented on Apr 7

    Why is it that the Canuk banks are smarter than ours? RBC and BMO are good franchises.

    Agree with the analysis.

  7. DL commented on Apr 7

    Whether right or wrong (and probably right in this case), it’s good to see that there are at least a few analysts at established investment firms who will admit that stocks can go down as well as up. (Add Meredith Whitney to the short list).

  8. Vermont Trader commented on Apr 7

    i don’t think banks are trading on P/E ratios. They are trading on dividends, payout ratio’s, and book value ex-goodwill.

    Think the markets are presenting a great shorting opportunity here on broad indices.

  9. Philippe commented on Apr 7

    As a rule of thumb, on all mergers and acquisitions 40 Pct only succeed (if in doubt please read the recent controversy on the well being of Citi bank through mergers) The banks are holding a large chunk of their mergers and acquisitions deals 250 billions USD. How will such loans will fare in an economic downturn?
    Banks are far from over in writing off the loans falling in the normal scope of business and much farther in having written off the sub prime and associated products. Many accommodations have been made through very modern accounting such as banks posting profits on their own bonds issues when prices of their own bonds decline. They will have to issue more shares (if they can) with a share price dilution and everything remaining the same their own bonds prices should………increase.
    An other false idea Banks perform better in inflationary cycles NO they are worse off as long term interest rates should pick up and so does the yield curve and its belly (In a normal world without 500 trillion USD in derivatives and most of them in interest swaps).
    The total write off on subprime is around 250 billion USD and Pareto is still to be vindicated at 650 Billion USD

  10. Pat G. commented on Apr 7

    #6: And we still don’t know what they know.

    Allthough supposedly, the picture is becoming clearer.

  11. Fred commented on Apr 7

    yeah but, if sovereigns have decided that weathering a loss on their positions for a few years is worth buying into financials, isn’t it purely academic? i wouldn’t buy financials because i think there are frankly better stocks but if the big money wants them to tread water (versus sink), such it shall be…..

  12. blin commented on Apr 7


    That is because the MSM in Canuckland does not control the airwaves the way the MSM in the US controls content.

    As an example, when I heard about the Virginia Tech shootings, after frantically searching most of the major MSM websites of the US, I found that the CBC (or some other Canadian link) gave much more information than any other major US website regarding the suspect…they actually correctly identified the suspect. At that point, I came to the realization that the US media is controlled.

    It was a sad realization but a realization none the less. How could a Canadian news outfit provide more info than the locals?

    Never mind… you don’t have to answer that.

  13. Short Man commented on Apr 7

    As Vermont Trader pointed out, the last few trading days have been excellent entry points to establish new short positions. Looks like the pre-emptive Wamu rescue was good to prop the markets for about 4 hours hours.

    The best analogy I can think of for the disconnect in the markets is an entire village in a floodplain where a massive dam is starting to spring leaks. As the leaks pop up, villagers elders rush forth to stick their fingers in the wall to plug the hole. Each time that happens, the villagers rejoice and hold a big feast to thank their elders rather than jumping on a horse and getting the hell out of there. Sucks to be them but that seems to be what is happening in the investor crowd every time a financial gets “rescued” while trading at 10-30% of their 52 week high. Thank god it’s not my money….

    VIX was heading for 21 this morning, great time to buy more puts.

  14. mike commented on Apr 7

    I would suggest to RBC to stay away from reversion to the mean Standard Deviation analysis. It only works under normal market conditions which these current markets are not. Even under normal conditions, the risk exposure to such strategies does not justify the reward.

  15. Dumpster commented on Apr 7

    Want to see something fun.

    Go to Yahoo finance an take a look at who the top two or three stockholders are in any given large Canadian bank.

    Hint: They are all OTHER Canadian banks….YIKES! No concentration of risk there.

  16. Bob A commented on Apr 7

    7. Nobody knows what the hell anybody’s house is really worth.

  17. Francois commented on Apr 7

    “At that point, I came to the realization that the US media is controlled.”

    Congress is also controlled. Less than 1/2h after the Virginia Tech shooting news broke, gun lobbyists were busy calling and meeting with Senators and House Unrepresentatives.

    Needless to say they were successful…after all, they are the true employers (they pay the bills, ergo…) of the sorry bunch we’ve got in DC.

  18. VennData commented on Apr 7

    6) The same guys are running the same banks. The same guys are regulating those banks. The same guy that manages the regulators is in the Big White House.

  19. DMR commented on Apr 7

    NYT today:

    “Vietnam’s central bank even had to order the country’s commercial banks late last month to resume buying dollars within the tight range of exchange rates set by the government. Many banks had started betting on dollar depreciation and refusing to accept large sums in dollars, to the point that multinationals and exporters had trouble wiring money into the country to pay their employees’ salaries.”

  20. mike commented on Apr 8

    Nobody knows what you think they do.

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