Bank Stocks Slide as Fed Meeting Begins

NEW YORK (TheStreet) -- Zions Bancorporation (ZION) of Salt Lake City led U.S. bank stocks lower on Tuesday, with shares sliding 1.7% to close at $28.07.

The broad indices all pulled back as the Federal Open Market Committee began its two-day policy meeting.  Investors are wondering whether the committee will decide on Wednesday to taper the Federal Reserve's "QE3" purchases of long-term U.S. Treasury bonds and agency mortgage-backed securities, which have been running at a net pace of $85 million a month since September 2012.  The purchases have been meant to stimulate the economy by holding long-term interest rates down.  While long-term interest rates are still at low levels, the market yield on 10-Year U.S. Treasury bonds has risen to 2.85% from 1.70% at the end of April, as investors have anticipated the begining of a slowdown in central-bank bond buying.

Any change in stimulus policy will be discussed by outgoing Federal Reserve chairman Ben Bernanke during a press conference Wednesday afternoon.

Most economists expect Federal Reserve stimulus policy to remain unchanged until some time during the first quarter of 2014.  The FOMC will be considering plenty of positive economic data, including the upward revision of the third-quarter gross domestic product growth estimate to an annual rate of 3.6% from the previous estimate of 2.8%, and a decline in the U.S. unemployment rate to 7% in November from 7.3% in October.

On the other hand, slow inflation may keep pressure off the Fed to make a change.  The Bureau of Labor Statistics on Tuesday said the consumer price index for all items was unchanged for November, while rising 1.2% from a year earlier.  Excluding food and energy, the CPI was up rose 0.2% during November, with prices rising 1.7% from a year earlier.  Economists polled by Thomson Reuters on average had expected the CPI and core CPI both to increase by 0.1% during November.

The expectation for a continued increase in long-term interest rates bodes well for life insurers, which have seen a very strong stock run this year.

But banks are likely to see continued pressure on their net interest margins during 2014 according to RBC Capital Markets, which actually has a pretty positive outlook for the sector's stock performance next year.

What most banks need to see expanding net interest margins and significantly higher net interest income is a parallel rise in interest rates, which will require a change in the Fed's policy for the short-term federal funds rate, which has been locked in a target range of zero to 0.25% since late 2008.  the FOMC has repeatedly said this "highly accomodative" policy would likely remain appropriate until the unemployment rate falls below 6.5%, assuming inflation is held in check.

Bernanke has said it might be appropriate for the federal funds rate to remain right where it is even after the unemployment rate falls below 6.5%.  Any deviation on Wednesday from his past remarks will be of great interest to investors and bankers.

The KBW Bank Index (I:BKX) on Tuesday was down 0.8% to 66.58, with all 24 index components ending with declines.

Zions

Shares of Zions Bancorporation have returned 32% this year.  The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, for 15.2 times the consensus 2014 earnings estimate of $1.85 a share, and for 13.4 times the consensus 2015 EPS estimate of $2.04.

The bank on Monday announced it had determined that "substantially all" of its investments in trust preferred collateralized debit oblations (CDOs) would be disallowed under the final regulations to implement the Volcker Rule, which were announced by regulators last week. 

The company said it would record a fourth-quarter other-than-temporary impairment charge of $629 million on the transfer of disallowed held-to-maturity securities to held-for-sale.  The bank also said it had until July 21, 2015 to sell the trust preferred CDOs, "unless, upon application, the Federal Reserve grants extensions to July 21, 2017."

Please see Volcker Rule Could Hurt These Community Banks for information on two community banks that may see relatively large reductions in earnings springing from Volcker, as well as one bank likely to see a benefit.

The following chart shows the performance of Zions Bancorporation's stock against the KBW Bank index and the S&P 500 :

ZION ChartZION data by YCharts

Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for this stock.

-- 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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