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Bank Stocks Roar as Ukraine Simmers

NEW YORK (TheStreet) -- Stocks of major U.S. banks on Tuesday made up their losses from the previous session and then some, as the situation in Ukraine appeared to ease, at least temporarily.

The Dow Jones Industrial Average (^DJI) ended with a 1.4% gain, while the S&P 500 (^GSPC) rose 1.5% and the NASDAQ Composite (^IXIC) added 1.8%, following European markets higher, as tensions in the Ukraine appeared to ease. A widely reported deadline for Ukrainian forces in Crimea to surrender to Russian troops passed without any action taken, and Russian President Vladimir Putin ordered troops near the Ukrainian border on military exercise to return to their bases by Friday.

Putin said Russia would use military action in Ukraine beyond Crimea only as a "last resort," although he played his usual word game in saying ousted Ukrainian president Viktor Yanukovych remained the lawful leader of Ukraine, and that Russia had been responding to Yanukovych's request for assistance.

U.S. Secretary of State John Kerry while visiting Kyiv on Tuesday said during a press briefing that the Russian government was "out of excuses, hiding its hand behind falsehoods, intimidation, and provocations." He added that it was "clear that Russia has been working hard to create a pretext for being able to invade further."

Must Read: Citigroup Leads Banks Lower on Ukraine Concerns

Kerry also said, "I've spoken as directly to President Putin today as I can to invite him to engage in a legitimate and appropriate dialogue, particularly with the current Government of Ukraine, knowing that there's an election in 90 days and the people of Ukraine will have an opportunity to ratify their future leadership."

U.S. investors were quick to accept the changed reality in Ukraine, while also taking in stride the threat of rising energy prices in Europe, since Russian gas exports to Europe pass through various pipelines in the Ukraine.

In a note to investors discussing global equity strategy, Credit Suisse analyst Andrew Garthwaite on Monday wrote that Russia's invasion of Crimea would have "limited impact" on global economic growth. "Russia is only 2.9% of global GDP ($2.2tn in 2014, on IMF estimates), with the Ukrainian economy accounting for a further 0.4% of global GDP," he wrote.

"Germany is probably the most heavily impacted major developed market," Garthwaite added, with an estimated 50% of Germany's oil imports and 39% of its natural gas imports coming from Russia.

Looking beyond the crisis in Ukraine, Garthwaite estimated 8.5% growth in earnings-per-share for the S&P 500 during 2014, and said Credit Suisse's research team continued to believe profit margins for U.S. companies wouldn't peak until 2016.

But Garthwaite's view isn't completely positive: "We think that the main threat to global markets is China, where product price deflation risks pushing nominal GDP growth close to historic lows. Furthermore, in our view it has the third biggest credit bubble of all time, the biggest investment bubble of all time and real estate investment as a proportion of GDP at the same level as during the peak of the cycle in Ireland and Spain," he wrote.

The KBW Bank Index (I:BKX) on Tuesday rose 2% to 69.62, with all 24 component bank stocks gaining over 1%. The index has returned 1% this year, following a 35% return during 2013.

Large-cap U.S. banks showing gains of close to 3% included Morgan Stanley (MS - Get Report), which closed at $31.10, and SunTrust (STI - Get Report), closing at $38.20. Both banks are considered globally systemic important banks (GISI) by U.S. regulators and the Basel Committee. This is especially important in light of the Federal Reserve's annual round of stress tests, which will be completed on March 20.

Then on March 26, the Fed will announce the results of its annual Comprehensive Capital Analysis and Review, which is the incorporation of large banks' plans to deploy excess capital, to the same stress-test scenarios.

Investors expect plenty of dividend increases and share buybacks from large-cap banks on March 26. For more on what to expect, please see Why You Should Celebrate Bank Stress Tests and Citigroup, Stress Tests and Shareholder Gravy.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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