Bank Stocks to Avoid as Credit Worries Mount
Like a pinstripe-clad Roger Daltrey, bank investors were wondering
Bank of America
(BAC - Get Report) shook up the financial sector with cautionary words Tuesday evening about their
The bad news sent investors scouring their portfolios for lenders whose loan-loss and nonperforming-asset trends could point to emerging problems. Using those and other guidelines, three analysts shared their thoughts on which bank stocks might be vulnerable.
PressureBank One (ONE), still plodding through a major restructuring, leads the list of credit-risk-exposed stocks compiled by analyst Jennifer Thompson of Putnam Lovell. "Bank One is not only seeing pressure on the commercial side, but has indicated that consumer loss rates are trending up," says Thompson, whose firm rates Bank One a hold and hasn't done any underwriting. "They also have a fairly large auto-lease portfolio, which could continue to feel pressure as well." Bank One stock fell 5% Wednesday. Huntington Bancshares (HBAN) is another bank to avoid, Thompson says, noting an auto lease portfolio that could spur a second consecutive writedown in the fourth quarter. (She rates Huntington a hold, and her firm hasn't done any underwriting for the bank.) Huntington dropped 1.4% Wednesday. SunTrust (STI) and Wachovia (WB), both of which "have seen an increase in problem assets," are also stocks to keep an eye on, says Thompson. (Both stocks get the hold rating at Putnam, and the firm hasn't underwritten for either bank.) "In general, the areas that a lot of these banks are feeling pressure in are
AnxietyThough credit quality issues have loomed over bank stocks since as least mid-June, when historically conservative Wachovia roiled the sector with a
DisclosureStill, Vandervliet thinks the bank sector as a whole is being taken down for "problems that are concentrated" at a smaller group of banks. On that note, some analysts are pointing to banks with what they see as a better grip on credit issues. Even as influential Merrill Lynch analyst Judah Kraushaar cut earnings estimates on Bank of America Wednesday and noted "credit erosion taking place," he made some top recommendations for investors eager to stay invested in financials, including Citigroup (C - Get Report), Chase (CMB), Mellon (MEL) and Wells Fargo (WFC). Those stocks dropped between 1% and 4% Wednesday. And perhaps even credit worries can have a silver lining. With all the recent hand-wringing over telecom debt, Vandervliet says Hibernia, for one, has taken the rare step of laying out its telecom exposure, which appears to be minor. "Banks have historically been reticent to provide that kind of detail," the analyst says. "Now that the market is throwing the baby out with the bath water, this should prompt banks to give us more details about the industries they play in."
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