New Rules, Bad Mortgages Weigh On Bank Stocks
by Gene Kirsch, Senior Banking Analyst | July 28, 2011
Many banking stock prices have fallen to fresh new 52-week lows with the likes of Morgan Stanley (MS, $20.18, July 18, 2011) and Goldman Sachs (GS, $125.50, July 19, 2011) among them. While others have come perilously close to their yearly lows, some have even approached multi-year lows. On July 19, 2011, Bank of America’s (BAC) stock was at $9.40, a price range it hasn’t seen since its low of $8.80 on May 4, 2009.
You won’t have to look far to find other bank names you’ll recognize with falling stock prices. In fact, major regional bank stocks are down 23% year to date through July 25, 2011, while the general market has been up a healthy 8%.
What’s contributing to the unusual weakness in the banking sector? There’s the typical summer slowdown in business, the overall slow economy and the looming U.S. budget crisis all leading to lower revenues. But unique to this industry is the remaining overhang from mortgage loans gone bad and the new regulatory environment that came with implementation of the Dodd-Frank Financial Reform Act that passed in 2010.
Banks are still seeing the effect of the housing market crash as they write-down the loans of borrowers who can’t or won’t pay for mortgages that are higher than existing property values. Even banks that are reaching out to customers to modify loans rather than foreclose have had to take a hit for the reduced value of those mortgages. And, many are making provisions now for loan problems they expect in the future as the lackluster job market continues to impact communities across the nation.
You can take a look at the list of 25 largest banks with the most mortgage exposure and their Weiss Financial Strength Rating at http://weissratings.com/ratings/banks-delinquent-mortgages.aspx.
Then there’s the regulatory reform banks are facing. Dodd-Frank increased the capital banks are required to hold. Keeping more cash to backstop possible emergencies in the financial markets gives banks less to invest in projects that would make them money. Banks have also been saddled with restrictions on fees they can charge, reducing revenue from customer products and services. And, banks are now also subject to tougher loan underwriting restrictions making it more difficult to increase lending activity. The new rules have put a big dent in the industry’s ability to earn income.
The heavy weight on bank performance will continue until some of the uncertainty is taken out of the market and management can find ways to stabilize costs and increase revenues. Until the industry works through the financial crisis fallout of 2008, it is doubtful the health of the U.S. economy will fully recover.
To review bank performance, see Weiss Ratings’ complete lists of the strongest and weakest banks at www.weissratings.com/banklists.
Gene Kirsch, senior financial analyst at Weiss Ratings, has more than 20 years of financial industry experience in credit-risk management, commercial lending and loan review analysis within various sized credit unions, finance companies and banks at both the retail and commercial level. He leads the firm's bank and thrift ratings division and developed the methodology for Weiss' credit union ratings.