Banks Face Serious Threat in Second Half

NEW YORK ( TheStreet) -- Bank stocks are likely see material weakness in the second half of 2014 unless the economy picks up and interest rates begin to rise, according to analysts.

Citigroup  (C) drew attention last week in forecasting a 25% drop in second-quarter trading revenue from the second quarter of 2013, but few commentators bothered to mention that the bank was almost as pessimistic about loan losses, noted Richard Bove, analyst at Rafferty Capital Markets. Bove also pointed to bearish commentary from Bank of America (BAC), PNC Financial Services  (PNC) and JPMorgan Chase  (JPM) executives at two separate conferences in New York last week hosted by Deutsche Bank and Sanford Bernstein.

"Revenue is likely to disappoint for most banks for the foreseeable future," wrote Deutsche Bank analyst Matt O'Connor in a note summarizing the German bank's conference, which included presentations from 60 different institutions.

Bove pointed to a report last week from the Federal Deposit Insurance Corp. which shows that after 16 straight quarters of growing year over-year-earnings through the second quarter of 2013, banks have seen earnings shrink on that same metric in two of the last three quarters.

Referring to the 1% drop in first-quarter GDP reported last week, Bove said, "If we have another 1% downer, bank earnings are going to start turning down, loan losses are going to pick up and bank stocks are going to be in trouble."

Bove is nonetheless optimistic on the banks, because he believes that both the economy will improve in the second half and that interest rates will rise.

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