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), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC).

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), State Street ( STT), US Bancorp ( USB) and Wells Fargo ( WFC).

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.

The Volcker Rule is another potential problem for the bigger banks. The rule is a ban on speculative trading by commercial banks where customer deposits are used in an attempt to achieve trading profits in stocks, bonds, commodities and currencies. Last week, the banking regulators issued a joint release delaying the implementation of this rule until July 2014. I say that this delay is the first sign that the Volcker Rule will never be implemented.

A third issue is the exposure to Notional Amount of Derivative Contracts, which decreased by 7.4% or $18.58 trillion in the fourth quarter to a still huge $231.88 trillion on the balance sheet of the FDIC-insured financial institutions. Derivatives were a major cause of "The Great Credit Crunch" and their huge numbers keeps the banking system on shaky ground.

Notional Amount of Derivative Contracts have increased by $67.1 trillion since the end of 2007 to that $231.9 trillion figure. This is a huge read flag and will be the source of additional time bombs for the global economy. De-leveraging and financial reform is supposed to provide more transparency, but I have not seen any evidence that derivatives are under increased scrutiny.

Trading Parameters for the "Too Big To Fail" Banks:

Bank of America -- At $8.31 the stock is rated a hold according to ValuEngine with a one-year price target at $8.03. BAC traded above $10 a share on March 19 but did not close above that key level, which is a threshold for some stock mutual funds. My monthly value level is $6.24 with a weekly risky level at $9.66.

Citigroup -- At $33.60 the stock has been upgraded to buy from hold according to ValuEngine this morning with a one-year price target at $35.31. Citi traded above $38 a share on March 19. My monthly value level is $30.66 with a weekly risky level at $35.60.

JP Morgan -- At $43.79 the stock is rated a hold according to ValuEngine with a one-year price target at $45.55. JPM traded above $46 a share on March 27. My annual value level is $41.66 with a weekly risky level at $46.86.

Wells Fargo -- At $34.09 the stock is rated a buy according to ValuEngine with a one-year price target at $36.73. Wells is trying to take-out its March 19 high at $34.59 and if successful the upside is to my annual risky level at $38.69. My annual value level is $32.70 with a weekly risky level at $35.46.

I have no conflicts with any of these stocks. Newmont Mines is in my ValuTrader Model Portfolio.

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