S&P Downgrade Hits Bank Stocks Hard
by Weiss Ratings | August 15, 2011
If you’ve been watching the market, and who hasn’t, you can’t miss that banks stocks have been hit hard following the Standard & Poor’s downgrade of U.S. credit.
As of market close on Friday, August 12, US Bancorp (USB) and Huntington Bancshares (HBAN) were both down over 10% from the open on August 5th. Wells Fargo (WFC) and JPMorgan Chase (JPM) declined 8% and 6% respectively. Fifth Third Bancorp (FITB) fell 17% and Citigroup (C) fell by 15%. The biggest drops were Regions Bank (RF) by 21% and SunTrust lost (STI) 18% of its value.
While the broader market took down almost everyone (no, make that everyone) and then began to waver between uncertain gains and losses, key factors led banks to be some of the hardest hit. Here are some reasons why.
The financial reform provisions of the Dodd-Frank Act that are now in place or are being phased in are weighing on bank revenues and increasing expenses. Revenues are down from the previous quarter because banks have had to significantly scale back what they charge on debit card fees and transactions. Banks have been left with a revenue vacuum until they find ways to replace those lost fees.
Further, deterioration in the economy has created stagnant or no loan growth for many of these financial institutions. In fact, lending on a quarter over quarter basis is down for many segments of the lending market.
While it is true, the industry income for Q1 2011 rose from the prior quarter, much of the improvement is attributed to a reduction in loan loss provisions (what banks set aside for future losses). But this may not be the case going forward if more losses are projected for future bad loans.
Continued economic weakness for the second half of 2011 is leading the market to discount bank stock prices based on what will ultimately be reduced future Earnings per Share (EPS) for 2011 and 2012.
More specifically, banks such as Bank of America (BAC), Wells Fargo (WFC) and others that still have heavy mortgage portfolios are being punished for the threat of litigation on mortgages, mortgage backed securities, fraud and the mortgage overhang from ongoing foreclosures. For example, AIG is suing Bank of America for $10 billion for fraud on mortgage backed securities it acquired from the takeover of Countrywide Mortgage in 2008.
It’s telling that neither the government nor the banks that stepped up to try to minimize the damage of failures such as that of Countrywide Mortgage, had the foresight to demand sufficient legal protections for the messy mortgage business they farmed out or acquired. And, it seems the government missed another opportunity to minimize litigation between TARP bailout recipients. If the claims get big enough, is it possible taxpayers will have to bailout some of the same companies, yet again? Will we again be faced with the “too big to fail” dilemma? It may be quite possible.
Weiss Ratings Senior Bank Analyst, Gene Kirsch, noted that “firmness in the banking sector might not be seen until we have stability in the regulatory and political arenas.”
At its most basic level, the bank stock hit is a continuing trend from earlier in the year — it’s just been accelerated and magnified because of the debt downgrade.
And while it may not be fixable in the short term, Kirsch noted that “consumers should continue to monitor a bank’s soundness by checking its rating on the Weiss Ratings website and talk to your particular bank for reassurance of the bank’s commitment to you, the customer.”
About Weiss Ratings
Weiss Ratings is the nation’s leading independent provider of bank, credit union and insurance company financial strength ratings, accepting no payments for its ratings from rated institutions. Weiss Ratings also provides debt ratings on 49 sovereign nations.
By adhering to its independent business model, Weiss outperformed Standard and Poor’s, Moody’s, A.M. Best and Duff & Phelps (now Fitch) in warning of future life and health insurance company failures, according to a 1994 study by the U.S. Government Accountability Office (GAO). Similarly, Weiss was the only one to identify, in advance, nearly all major banks that failed or required a federal bailout in the 2008 debt crisis.