Making sense of the bank surge

Here's my theory on what's driving the bank index to breakout levels.

By Jim Cramer Sep 11, 2013 9:38AM

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Bank sign © John Foxx, Stockbyte, Getty ImagesThe banks have gotten into inexplicable territory the last few weeks. There's no doubt in my mind that most of the numbers for most of the banks are now too high, given the sudden decline in mortgages and refinancing vs. any pickup in construction loans, or any other loans, for that matter.

Plus, these behemoths typically can't cut the rolls of employees fast enough to make up for the losses in the mortgage business. They can't make it up in servicing either, although Wells Fargo (WFC) has a mighty servicing business. It's one the bank could never have been allowed to have if it hadn't taken advantage of the chaos in the U.S. financial world five years ago.

In the meantime, there still isn't enough shift in the yield curve for them to be able to reprice the certificates of deposits that are rolling over, which would allow them to make much more money on them than what they'd done before. Plus, these don't roll over all at once, and there are plenty of not-so-lucrative CDs on the books at these banks.

Meanwhile, we haven't seen the type of mergers and acquisitions that we would expect to see at this stage of the cycle. After all, there's been a great deal of concentration in the group in the wake of the financial chaos visited upon this country, during this exact period, a half-dozen years ago. I keep hearing talk of a potential bid for Sterling Financial (STSA), a $1.8 billion bank out of Spokane, Wash. But this is the only bank of any size I hear chatter about, and that does say it all. It's a rounding error in the business.

So what's driving the bank index to breakout levels? How can that be, given the potential slowdown in revenue that seems quite evident?

My takeaway is that the comeback in housing has literally made it so there is a dramatically reduced number of bad loans on the books. Every bank continues to carry gigantic reserves for bad loans, and yet even the worst of the mortgage bonds of the old days have come back to life with the sudden and dramatic increase in homes. I keep thinking about what Russell Goldsmith -- the fabulous president and CEO of City National (CYN), Los Angeles bank to the stars -- told me the other day. He said there are now fewer than three months' worth of inventory in California, and the value of the homes themselves have increased by about 30% year over year. That means banks actually have profits on repossessed homes for which they might have taken big charge-offs.

Now, banks do not make money carrying homes. None of them do. Homes are extremely costly to maintain, and there's also a terrible legal cost to the process. But what matters is the ease with which these homes can now be sold, and they can now be sold with no problems, and at much higher prices than what banks had thought possible even a year ago. If there is an adjustment in the consumer's thinking about how rates aren't going to go down much more, and if they're now thinking it is time to buy, then you are going to see better numbers on mortgages in 2014. At the same time, you will also see much better reserve reversals that will continue to add to the bottom line.

I think that's the story: bad loans going to good, simultaneous to the possibility of a stronger economy actually generating some loan growth away from mortgages.

It makes sense. Or, at least, it gives you some rationale for the strength of a group that realistically should be coming down because the earnings might not be coming through.

Random musings: Sure, like everyone else, I was disappointed with Apple's (AAPL) offerings. Turns out, once again, Intel (INTC) should have just bought Arm Holdings (ARMH) -- the real winner in Tuesday's announcements.





Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long WFC and AAPL.



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Sep 11, 2013 10:29AM
Or maybe ....just maybe.... it's because they can borrow our money from the fed at 50 basis points and lend it out at between 4 - 19.8% depending on the type of loan !!
Sep 11, 2013 10:48AM
For they legally stole from the rest of America bankrupting the common person while laughing at what Congress did not do while their obscene bonuses continue to get paid out. 
Sep 11, 2013 10:59AM

banks pay next to no interest to account holders and try to charge 8% for a credit line.

WF bank charges me  2% to swipe a credit card and charges a fee for cash deposits.


They did not lend money when given a stimulus, instead becoming a service provider while collecting interest on bailout money.


Article could have been that short


Sep 11, 2013 10:32AM
Only cramer can see this as being a "profit" .....

"That means banks actually have profits on repossessed homes for which they might have taken big charge-offs."

Write off a 300K mortgage down to a 100K value .....sell at 130K and book a 30% profit !!! 

Crooks math .....right up cramers alley !!!
Sep 11, 2013 11:26AM
Because they got bailed out instead of Americans, they didn't pay it forward. Instead foreclosed on everyone and resold homes.  They are scum of the earth, just like Washington.
Sep 11, 2013 10:53AM
Banks are surviving on the Fed, another bank. The Fed bought over a trillion dollars worth of the bad mortgage loans. The banks are making money on QE 3, the bond market is just another way of giving them profits. Hyman P. Minsky said that "bankers lie." He was right.
Sep 11, 2013 11:08AM

What? Fed Member Banks gave 95% of the Quantitative Easing funds (read: TRILLIONS) to the top 1% income earners. Since they didn't hire anyone, they obviously spent 100% of that in stock markets and debt instrument purchases. The Return On Investment (ROI) to bankers was-- ZERO. The scam that was Operation "Twist" purchased every lousy piece of credit banks booked. That meant sectors like- Automotive, saw increases against the grain of the economy, facilitated by Subprime lending and irresponsible portfolio management (see that Debt Collection fine article).

THIS WAS A JOKE AND NOW WE HAVE NO CHOICE BUT TO ROUND UP AND EAT THESE RICH FOLKS BECAUSE THEY WILL POLLUTE OUR FUTURE GIVING IT AS INHERITANCES IF WE DO NOT. Start writing us checks, fools... or face some mighty ugly and angry fellow Americans. Where do you run to once you've screwed the whole world? Buy a hand basket FIRST.

Sep 11, 2013 11:15AM

Please have the stock market continue to go up so that the banksters, Ben Bernanke friends and all the Wall Streeters can continue to sail their yachts and live the good life, while the middle class works all day and charges needless purchases on their credit cards.

Greed is good and wall street and the banksters rock....please hit LIKE if you know I am being sarcastic

Sep 11, 2013 11:13AM
Anyone who doubts the need for banking regulation need only look to the North.
Our banks are heavily regulated however;
1 not one bank required a bailout]
2 all the major Canadian banks are making great profits (including last quarter)
3 several have raised their dividends last quarter (some as much as 5%)
4 when you buy an asset, it's yours, there is no fine print saying they can sell it without your consent or without your knowledge
5 houses are not, and have not been foreclosed on illegally and housing prices are rising 
Sep 11, 2013 10:38AM
A milk toast article hardly worth one's time or effort.
Sep 11, 2013 11:04AM
What I like is the Bank of Ozarks when you are 1.00 over on your automatic check payment and they run it thru twice and the bank charges you $35.00 each time and than you are $71.00 in the hole.
Sep 11, 2013 11:33AM
The Banks must be kept healthy. However,the playing field is so one sided that it has become cronyism.
Sep 11, 2013 11:06AM
Making sense of the bank surge?


Sep 11, 2013 11:51AM
Hey Jim the Fed is giving them money for 1/4% so why would they not make money?? Now who is going to pay for this give away from the Fed?? I think the tax payers will pay for this bull!!!!
Sep 11, 2013 11:03AM
Good! Now they can pay back their bail outs.......
Sep 11, 2013 12:11PM

Looking at my current bank statement for our MMA. Take $10,059.26 and add $1.28 interest to it for the month and you have $10,060.54.  Slowly inching my way up to join the ranks of the 1%.



Sep 11, 2013 12:39PM

Free Money or at very low cost....??

Doesn't that answer the question, without all the other bullshidt and dribble..

Sep 11, 2013 11:50AM

dont forget that the banks make profits that enable executives to make multi million dollar salaries

off the backs of their workers who get cut to part time and work for slave wages

Sep 11, 2013 11:39AM
They are hiding shadow inventory of homes w/toxic bailout money or they would and eventually will collapse. Non mainstream media can be accessed at or x22report you tube channel. These guys (main stream)spin government fairy tales.
Sep 11, 2013 11:18AM
Definitely tired of the bank stories!!!  We know what happened and we know what's happening.   Jims pals at GS are loving it that they made the DOW(n).  So why not prop up the whole group.  Maybe this article would help us out about Friday morning, but he was too busy getting his calls, margin increases and stock purchased right!
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