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Big Banks Post Mixed Results, But the Worst Could Be Over

Source: CNBC

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Posted on 20 Jan 2010

Major banks continued to post mixed results on Wednesday, reflecting the industry's slow recovery, but there were some signs that the worst may be over for the battered sector.

"I think we are approaching some sort of normality here," said Mal Polley, chief investment officer, Stewart Capital Advisors. "I think chargeoffs will still be high, but it's definitely stabilized."

Reflecting the uneven results, bank stocks were mixed. Traders were encouraged by an improving credit trend in Bank of America and other banks. There also was optimism that the Republican victory in the Massachusetts Senate race could push financial regulation to the back burner in Congress.

Still, analysts remained cautious about the outlook for financials. Even with the "huge variability" in financial results, there is still a common trend of "high volumes of writeoffs," Bob Parker, vice chairman at Credit Suisse Asset Management, told CNBC

In addition, big banks' performances will rely heavily on the strength of the economy in 2010, and a slow recovery could have a negative impact on their future earnings, Paul Miller, head of financial services at FBR Capital Markets, said in a separate interview on CNBC.

"If the economy doesn't recover by the mid-part of 2010, losses are going to stay elevated and banks' earnings are going to be under pressure," Miller said.

Miller said he is particularly worried about the housing market and what will happen to it once the Federal Reserve halts its purchasing of mortgage-backed securities.

He doesn't think the housing sector will recover anytime soon, and as a result, he said it will be difficult for banks to trade at above two times their book value. He specifically pointed to Wells Fargo, which is currently trading at almost 2 1/2 times its book value, saying it is overvalued.

But Miller said investors should focus more on banks' topline revenue and outlook than their earnings.

"I think investors have accepted the fact that credit costs are going to be high and elevated for a long period of time, but the issue is can they earn themselves out of it," he said.


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