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High Risk Bank Stocks May Recover Sooner

By Chuck LeBeau, director of analytics at SmartStops.net.

In its January report, the IMF said: "Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount."

But in spite of facing huge loan losses rivaled only by those during the great depression some bank stocks might now be poised for recovery.

Coming to the aid of U.S. banks the Financial Accounting Standards Board recently relaxed mark-to-market accounting, which has been blamed for exacerbating banks' capital problems. The changes mean that banks can now value toxic assets by their own models rather than what they would fetch on the open market. Some analysts have calculated that the change could boost quarterly profits at some banks by up to 20 per cent.

Bank of America (BAC - Get Report) CEO Ken Lewis says that BofA is on track to achieve $30 billion in post-tax earnings by 2011. Some optimistic analysts agree with Lewis and point out that the worst may already be over and BofA may actually recover to match its 2006 high of more than $55. In the meantime the nearer term price targets are in the area of the January 2009 highs above $14. Unlike many smaller banks Bank of America appears to have adequate resources to weather the flood of loan losses that may be on the horizon. BAC made a low of $2.53 in February and has recovered to trade above $7.00 recently. The current SmartStop sell alert would occur if prices declined to $5.44.

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