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Regional Banks -- More Stress Ahead

NEW YORK ( TheStreet) -- When I analyze regional banks, I focus on the 24 banks in the PHLX KBW Banking Index (BKX), which may have peaked at $50.69 on March 19. This index includes the four banks considered "too big to fail" -- JP Morgan (JPM - Get Report), Bank of America (BAC - Get Report), Citigroup (C - Get Report) and Wells Fargo (WFC - Get Report).

The BKX is up 55.7% since the October 2011 low and is up 24.1% year to date. Looking at the weekly chart for BKX we show that technical momentum (12x3x3 weekly slow Stochastic) reading is declining with BKX above its 200-week simple moving average at $46.00, which is a neutral configuration. My monthly, annual and quarterly value levels are $46.09, $42.98 and $41.10 with a weekly risky level at $51.30.

Fundamentally, 11of the 24 members of the BKX are rated a buy according to ValuEngine with the other 14 rated hold. The buy-rated regional banks are: BB&T Corp (BBT), Citigroup, Capital One (COF), Fifth Third Bank (FITB), Huntington Banc (HBAN), Keycorp (KEY), PNC Financial (PNC), Regions Financial (RF - Get Report), State Street (STT), US Bancorp (USB) and Wells Fargo (WFC - Get Report).

Regions Financial recently repaid its $3.5 billion in TARP money received from the federal government. The company used proceeds from the sale of Morgan Keegan to Raymond James (RJF) and a $900 million common stock offering to raise the funds.

Wells Fargo recently mailed a notice to companies that have a Small Business Line of Credit Account indicating that the interest rate will rise significantly in this month. This increase may cause some small businesses clients to hold off hiring / expansion plans. With the prime rate at 3.25% the line of credit interest rate goes from 5.75% to 8.25%, as the spread to the funds rate rises from 2.50% to 5.00%.

An issue for all 24 big banks is increased assessments to fund the FDIC Deposit Insurance Fund (DIF). Under Dodd-Frank the DIF must be expanded to 1.35% on insured deposits by Sept. 30, 2020. The current reading is an anemic 0.13%. If this rule was in effect today the DIF would have to be at $94.2 billion versus the current $9.2 billion. By Sept. 30, 2020, this amount could be doubled given the 62.6% growth rate of insured deposits over the past four years. Insured deposits are up as a flight to safety of up to $250,000 per bank. These bigger banks are subject to assessments based upon total assets at a higher percentage than the smaller community banks.

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BAC $14.56 0.00%
C $46.28 0.00%
JPM $63.20 0.00%
RF $9.38 0.00%
WFC $49.98 0.00%


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