NEW YORK (TheStreet) -- Bank stocks are pricing in a double-dip recession, but industry analysts contend that the impact of a downturn this time around might not be as severe as first thought.
The consensus is that banks, especially the big four-Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC)- have much stronger capital and liquidity levels, indicating that they have a much stronger capacity to absorb losses.
Barclays Capital Credit Research analyst Jonathan Glionna notes that the total tangible common equity of the four largest U.S. banks has grown from $248 billion at the second quarter of 2007 to $471billion at the end of the most recent quarter. "If a downside scenario were to materialize, we would expect the four banks' combined quarterly preprovision earnings of more than $30 billion to offset a substantial portion of loan losses or legal charges as they occur; however, if earnings streams diminish, the major banks would still have this large pool of capital to absorb losses," he said in a note.What's more, while another recession will undoubtedly stall loan growth, the credit losses might not be as exaggerated this time around. "At this point, we do not see the current environment as indicative of meaningfully higher-than-expected credit costs," Goldman Sachs analysts wrote in a report. They cite three reasons.
- First, the majority of levered loans underwritten prior to this credit cycle have already been charged off.
- Second, loans that have been more carefully underwritten in the 2008-2010 period are now a larger part of the book.
- Finally while the level of unemployment remains high, there is unlikely to be a rapid flow into unemployment in the manner seen in 2008-09 when the unemployment rate doubled from 5% to 10%.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV