Bank of America scores biggest bounce

Bank of America shares have led the rally among big banks, soaring 460% from a year ago, but further gains might elude the group.

By TheStreet Staff Mar 9, 2010 10:33AM

TheStreetBy Michael Baron, TheStreet

 

Fearless investors who bought shares of the big banks while the markets were in freefall a year ago would have done best with Bank of America (BAC).

 

The stock dropped to its 52-week low of $3 on March 6, 2009. It has soared nearly 460% since then, based on last week's closing price of $16.70. The performance of other financial stocks on the same basis is impressive as well, but can the rally continue?

 

The circumstances behind last year's extreme weakness were extraordinary, so it's fair to say that the levels of last March have an element of artificiality to them. After all, the lows were made when worries about the stability of the financial system itself were rampant. Still, looking back and seeing that five of these six companies (with Morgan Stanley (MS) being the laggard, rising a mere 82% off its low of $16.12 on March 9, 2009) have more than doubled in the past year does make one wonder what happens if the economic recovery slows down.

 

Fourth-quarter results were disappointing in general, stalling the early 2010 rally in the banks. Credit costs seem to have peaked, but it's still not clear when the banks will return to normal earnings growth.

 

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Another lingering issue is what the new capital requirements will be going forward. Judging by the demands made by the government to allow the banks to pay back bailout funds, the target seems to be a tier 1 common ratio of around 8%. But if the requirements are set higher, banks may need to sell more stock to raise funds, subjecting existing shareholders to further dilution.

 

This month wraps up the end of the first quarter, and the reports from the big banks will start appearing in mid-April. Between dealing with the fallout from new credit card regulations and heightened mortgage repurchase requests, earnings could fall short of expectations.

 

Citigroup (C), for example, is projected to break even for the period, which would be a strong improvement from its in-line loss of 33 cents a share in the fourth quarter. Goldman Sachs (GS) is expected to earn $4.23 a share for the March period, but Rochdale Securities analyst Richard Bove cut his 2010 estimates for the company last week, saying the Greek debt crisis had slowed trading. If that turns out to be true, the competition will take a hit as well. Merger activity is tracking along with last year's hobbled pace, so investment banking operations shouldn't be counted on to deliver an upside surprise.

 

The financials have bounced back somewhat following their weakness in the wake of the fourth-quarter reports, and are outperforming the broad market in 2010. Following Monday's close, the Dow Jones Industrial Average ($INDU) was up 1.2%, while the KBW Bank Index ($BKX) had tacked on nearly 5%. If first-quarter numbers fall short and the executive commentary is cautious, the tempered optimism that's brought the stocks this far could run out.

 

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