Cramer: Making Sense of the Bank Surge

Editor's Note: This article was originally published at 7:55 a.m. on Real Money on Sept. 11. To see Jim Cramer's latest commentary as it's published, sign up for a free trial of Real Money.

NEW YORK ( Real Money) -- The banks have gotten into inexplicable territory the last few weeks. There's no doubt in my mind that most of the numbers for most of the banks are now too high, given the sudden decline in mortgages and refinancing vs. any pick-up in construction loans, or any other loans, for that matter.

Plus, these behemoths typically can't cut the rolls of employees fast enough to make up for the losses in the mortgage business. They can't make it up in servicing either, although Wells Fargo ( WFC) has a mighty servicing business. It's one the bank could never have been allowed to have if it hadn't taken advantage of the chaos in the U.S. financial world five years ago.

In the meantime, there still isn't enough shift in the yield curve for them to be able to reprice the certificates of deposit that are rolling over, which would allow them to make much more money on them than what they'd done before. Plus, these don't roll over all at once, and there are plenty of not-so-lucrative CDs on the books at these banks.

Meanwhile, we haven't seen the type of mergers and acquisitions that we would expect to see at this stage of the cycle. After all, there's been a great deal of concentration in the group in the wake of the financial chaos visited upon this country, during this exact period, a half-dozen years ago. I keep hearing talk of a potential bid for Sterling Financial ( STSA), a $1.8 billion bank out of Spokane, Wash. But this is the only bank of any size I hear chatter about, and that does say it all. It's a rounding error in the business.

So what's driving the bank index to breakout levels? How can that be, given the potential slowdown in revenue that seems quite evident?

My takeaway is that the comeback in housing has literally made it so there is a dramatically reduced number of bad loans on the books. Every bank continues to carry gigantic reserves for bad loans, and yet even the worst of the mortgage bonds of the old days have come back to life with the sudden and dramatic increase in homes. I keep thinking about what Russell Goldsmith -- the fabulous president and CEO of City National ( CYN), Los Angeles bank to the stars -- told me the other day. He said there are now fewer than three months' worth of inventory in California, and the value of the homes themselves have increased by about 30% year over year. That means banks actually have profits on repossessed homes for which they might have taken big charge-offs.

Now, banks do not make money carrying homes. None of them do. Homes are extremely costly to maintain, and there's also a terrible legal cost to the process. But what matters is the ease with which these homes can now be sold, and they can now be sold with no problems, and at much higher prices than what banks had thought possible even a year ago. If there is an adjustment in the consumer's thinking about how rates aren't going to go down much more, and if they're now thinking it is time to buy, then you are going to see better numbers on mortgages in 2014. At the same time, you will also see much better reserve reversals that will continue to add to the bottom line.

I think that's the story: bad loans going to good, simultaneous with the possibility of a stronger economy actually generating some loan growth away from mortgages.

It makes sense. Or, at least, it gives you some rationale for the strength of a group that realistically should be coming down because the earnings might not be coming through.

Random musings: Sure, like everyone else, I was disappointed with Apple's ( AAPL) offerings. Turns out, once again, Intel ( INTC) should have just bought ARM Holdings ( ARMH) -- the real winner in yesterday's announcements.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long WFC and AAPL.

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