Bank Stocks Recover on Shutdown Day 4: Financial Winners

NEW YORK ( TheStreet) -- Zions Bancorporation ( ZION) of Salt Lake City was the winner among the nation's largest banks on Friday, with shares 2.5% to close at $27.76.

The broad indices all ended with solid gains, as congressional Republicans appeared more willing compromise on a deal to restore full government services and avert a default. Banks led the market, with the KBW Bank Index ( I:BKX) rising 1.2% to close at 62.98, with all 24 index components ending with gains.

According to a Washington Post report, "Privately, a number of GOP lawmakers are pushing for a shift from what they view as a futile debate on health-care to exploration of a broader deal to reduce the nation's debt." The unnamed sources for the report were quoted as saying House Speaker John Boehner (R., Ohio) had vowed not to allow the U.S. to default on its debt.

U.S. Treasury Secretary Jack Lew in a letter to Boehner on Sept. 28 said the "extraordinary measures" the Treasury was taking to maintain its borrowing power will "be exhausted no later than Oct. 17," unless the $16.7 trillion federal debt limit is raised.

During a press conference on Friday, Boehner continued to take a tough line, saying the budget impasse leading to the partial shutdown of the federal government on Tuesday, "isn't some damn game. But after 55 years of spending more than you bring in, something ought to be addressed. This year we'll have more revenue than any year in the history of our country and yet still have a nearly $700 billion deficit."

Market optimism Friday was also fed by the filing of plans by Twitter for a $1 billion public offering, and the successful initial public offering by Potbelly ( PBPB).

For bank stocks investors, earnings season begins early next Friday, when Wells Fargo ( WFC) and JPMorgan Chase ( JPM) announce their third-quarter results.

In his third-quarter earnings preview for large-cap U.S. banks, KBW analyst Christopher Mutascio on Thursday wrote "Unfortunately, it seems to us that the fate of the bank stocks (in terms of positive catalysts) is now tied directly to the macro-economic environment. A breakout of the GDP malaise could allow for further multiple expansion and outperformance."

"Conversely, "Mutascio added, "it is hard for us to envision further outperformance at these levels if economic growth remains sluggish -- leading to tepid revenue growth and EPS growth that is driven more by non-cash loan loss reserve releases than it is by pre-tax pre-provision income growth."

There's no indication the U.S. economy may seeing a "breakout" from its estimated second-quarter GDP growth rate of 2.5%, and depending on the length of the government's shutdown, the fourth-quarter number could look ugly.

For several years investors have been seeing bank earnings padded by a decline in loan loss reserves, as banks lower their quarterly provisions for loan losses. Major threats to third-quarter growth in pre-provision net income include major declines in mortgage revenue, as the refinancing boom subsides, with the biggest banks also expected to see a significant decline in trading revenue.

Atlantic Equities analyst Richard Staite in a report on Sept. 23 estimated the eight large-cap U.S. banks he covers -- including Bank of America ( BAC), Citigroup ( C), Goldman Sachs ( GS), Morgan Stanley ( MS), PNC Financial Services Group ( PNC) and U.S. Bancorp ( USB), in addition to Wells Fargo and JPMorgan Chase -- would see third-quarter mortgage production revenue drop 45% sequentially and 55% year-over-year, with trading revenue declining 20% year-over-year.

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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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