Regional Banks: Financial Winners

NEW YORK ( TheStreet) -- Regional Bank stocks were strong on Wednesday, while the broad market was buoyed by strong sales reports from the nation's three largest auto manufacturers.

The Dow Jones Industrial Average ended with a gain of 0.7%, while the S&P 500 ( SPX.X) was up 0.8% and the NASDAQ Composite ended 1.0% higher, even though President Obama strengthening his case for an attack on Syria.

Investors cheered after General Motors ( GM) said its car sales for August were up 15% from a year earlier, while Ford ( F) and Chrysler both reported year-over-year sales increases of 12%.

The consensus among analysts polled by Thomson Reuters was for U.S. car sales for August to increase by 12% from a year earlier. Shares of GM rose 5% to close at $35.85, while Ford was up 3.5% to close at $16.91.

The KBW Bank Index ( I:BKX) rose 0.7% to close at 62.94, with all but two of the 24 index components showing gains for the session.

Large regional banks with shares rising 1.5% or more included Commerce Bancorp ( CBSH) of Kansas City, Mo., which closed at $43.01; Huntington Bancshares ( HBAN) of Columbus, Ohio, closing at $8.39; and Regions Financial ( RF) of Birmingham, Ala., which closed at $9.49.

Investors shrugged off the latest Department of Justice leak concerning JPMorgan Chase ( JPM), sending the company's shares up nearly 1.5% to close at $51.87. Reuters reported that in addition to a previously leaked criminal investigation of the bank's energy trading activities, the Justice Department is investigating three JPMorgan employees based in Houston, for possible obstruction of justice.

According to the report, the employees may have withheld information from regulators.

Please see TheStreet's review of JPMorgan's immediate regulatory risks and the long-term opportunity for investors, which is part of our look back on the fifth anniversary of the height of the U.S. credit crisis, including the bankruptcy of Lehman Brothers , and the government takeover of Fannie Mae ( FNMA) and Freddie Mac ( FMCC).

The KBW Bank Index has returned 23% this year, following a 30% return during 2012, beating the performance of the S&P 500, which has returned 16% this year, following a 13% return during 2012.

With the banking industry having made such a strong recovery this year, investors wondering what's in store for large banks are facing a wide array of opinions among analysts. Based on available data for the first two months of the third quarter shows, Deutsche Bank analyst Matt O'Connor in his firm's "bank cheat sheets" late on Tuesday wrote "Revenues seem to be tracking weaker than previously expected in most categories such as loans, securities, mortgage production and capital markets (although a strong September is still possible)."

Big banks like Citigroup ( C) and JPMorgan seemed to be heading for a 6% sequential decline in revenues, according to Deutsche Bank's data. While rising long-term rates will eventually be a boon to the banks, "higher medium/long term rates are a slight positive but short term rates are down 1-2bps--so net interest margins are likely to remain under some pressure," O'Connor wrote. "On the flip side, credit and expenses are likely to again come in better than expected," he added.

Rafferty Capital Markets analyst Richard Bove in a note to clients on Wednesday took a longer-term view, writing that banks balance sheets have been dramatically strengthened, and that "the earnings capacity of the industry balance sheet has improved meaningfully. In fact, when viewed against history the earnings capacity of the industry is near post Depression and WWII highs."

Bove called the strengthening U.S. economy "a wind blowing at the back of bank earnings," and added that "The balance sheets will be unlocked allowing the funds to flow into the economy driving earnings higher."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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 TheStreet.com 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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