U.S. Bank Stocks On Upgrade Watchlist

U.S. Bank Stocks On Upgrade Watch ListThe near-term picture for U.S. banks is especially uncertain.

Their bond spreads are soaring as their European peers are subjected to significant pressure. The majority of outstanding bank loans remain concentrated in commercial and residential real estate, and intensifying deflation pressures will inevitably raise questions about banks’ ability to manage through another economic downturn so soon after the last one. Profits are under pressure as headcount steadily climbs and banks remain under nearly constant political attack. Through it all, though, the TED spread has remained narrow, underscoring that perceived banking sector risk is much less than it was in 2008. Banks are better capitalized than they were before the crisis, as tangible equity and cash holdings have surged as a share of total assets. Bank deposits, the most stable source of funding, have grown sharply in recent months, while indicators of loan demand like the Fed Senior Loan Officer Survey are rising. And with the price/book ratio near its 2008 lows in relative terms, bank stocks have already discounted much of the bad earnings news in the pipeline.

Bottom line: Our U.S. Equity Strategy service is underweight the S&P bank index, partially in deference to the Euro area financial crisis. A resolution, coupled with an increase in economic confidence that would imply a boost in loan demand, would likely trigger an upgrade in our below-benchmark position.

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