Bank Stocks Remain Scary to Some

Bank Stocks Remain Scary to Some
Rally Offers No Comfort to Morgan Stanley Analyst, Expecting Long Drag on Lenders From Housing Bust
By DAVID GAFFENApril 29, 2008; Page C6
Bank stocks are no longer inducing night sweats among investors, but Morgan Stanley analyst Betsy Graseck doesn't feel comfortable with the sector's recent surge.
Shares of financial-services companies have rebounded since the middle of March, after a lot of investor pessimism was washed out in the wake of the announced Bear Stearns Cos. purchase by J.P. Morgan Chase & Co. and the Federal Reserve's efforts to heal ailing credit markets.
The Philadelphia Stock Exchange/KBW bank-stocks index has gained 11% since March 17, but Ms. Graseck says the rally is fool's gold. In a commentary Monday, she advised selling bank shares and lowered her overall estimates for 2008 earnings at the large-cap banks by 26%. Her earnings estimates for the sector in 2008 are 7% lower than the consensus.
"We think it is a mistake to chase this rally," she wrote. "The risk is much greater that credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends" more than the market expects.
Her thesis, essentially, is that the consumer environment looks pretty lousy. Ms. Graseck said that consumer net worth is likely to fall 11% over the next two years because of the housing bust and that loan losses will continue to rise.
She said current market prices on the large banks imply a return to more normal earnings after the downturn recedes, but she doesn't expect this to happen for another few years. She also expects further dividend cuts from a handful of the largest banks and anticipates the financial-services industry will be raising more capital in time.
In December, Ms. Graseck named Citigroup Inc. the firm's best "short idea" for 2008, which seemed like a catch-up move, as the brokerage had maintained "overweight" ratings long into the bank's selloff. But this idea has worked out well. Citigroup shares are down 9.6% on the year, though the stock has rebounded in recent days along with the rest of the sector.