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) 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.

Other bank stocks that may participate in a banking industry recovery include:

Citigroup Inc., ( C) with a January high at $7.59 and now trading at $2.76, the current SmartStops exit alert on Citigroup is at $1.90. Citigroup Inc.'s new board chairman, Richard Parsons, said financial institutions are being targeted for creating the nation's financial crisis, but they aren't the only ones responsible. Citigroup has received $45 billion in bailout aid, and the government also agreed to cover a portion of losses on hundreds of billions of troubled assets and loans.

J.P. Morgan Chase ( JPM) is one of the strongest banking stocks and is already up more than 75% since it made a low of $15.02 on March 9. On Tuesday the shares closed at $27.25, only a few dollars below the 2009 high of $31.84. The current SmartStop is $22.25.

Sun Trust ( STI) down more than 60% from the January high of $30.18, Sun Trust shares closed at $11.83 on Tuesday with the SmartStops exit alert currently set at $9.50. As of December 31, 2008, SunTrust had total assets of $189.3 billion and total deposits of $113.4 billion.

Wells Fargo ( WFC) would have to double to reach its January high of $30.47. WFC is currently trading at $14.85 with a SmartStop well below at $12.63.

Investors should keep in mind that banking stocks carry an unusual amount of risk these days and keep their SmartStops protection in place.

According to Martin D. Weiss, Ph.D., president of Weiss Research, Inc., an independent research firm, several of the nation's largest banks, including JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, plus more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts. Several large banking institutions received significant ratings downgrades from the prior quarter, including Citibank, downgraded from C- to D; Wells Fargo, downgraded from C- to D+; and SunTrust Bank, downgraded from C- to D+.

JPMorgan and Citigroup are among the companies expected to report earnings next week.

Note: SmartStop alert prices change daily. For up to date daily alerts visit SmartStops.net.

Chuck LeBeau is Director of Analytics at www.SmartStops.net and operates TraderClub.com.

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