UPDATE:Goldman Upgrades Large Banks, Sees Write-Downs Ending
May 21 2009 - 10:26AM
Dow Jones News
Write-downs and losses on over-leveraged bets may be over for
the largest U.S. banks, Goldman Sachs said Thursday, upgrading its
rating on large bank stocks to "neutral" from "cautious."
After about $100 billion in capital raises prompted by the
government stress tests of the 19 largest U.S. banks, Goldman said
large banks look like more attractive investments after the new
capital reduced their leverage levels.
Recent improvement in the credit markets may also signal that
write-downs are nearing an end, the firm said, and profits from
mortgage activity and capital markets will help fund banks' loan
loss reserves.
Goldman also upgraded to attractive its view of the trust banks
sector, and raised its rating on the credit card sector to
neutral.
However, the firm kept a cautious rating on the regional banking
sector, saying small banks are behind the capital-raising trend
started by the larger banks following the stress test, and that
they have a greater exposure to the potential for growing weakness
in commercial loans than the large banks. The firm had "sell"
ratings on about half of the regional banks it covers.
Large bank shares rose slightly early Thursday, with the
exception of Regions Financial Corp. (RF), which declined as much
as 20% following its $1.85 billion capital raise Wednesday.
Regional bank shares, however, declined in recent trading, with
Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN) and
Zions Bancorp (ZION) all down more than 7% each.
The upgrade of the large bank sector follows Goldman's upgrade
of Bank of America Corp. (BAC) on Monday on increased confidence
that banks can earn their way out of credit losses. Goldman has
been among the leading proponents of the "green shoots" theory
driving the markets higher in recent weeks - the firm's economists
see signs of a potential inflection point in several economic
indicators, including jobless claims, retail sales, industrial
production and housing prices.
However, Goldman said it still wasn't ready to put an
"attractive" rating on large banks, because of the rising level of
non-performing assets on bank balance sheets. The firm said large
banks' non-performing assets rose by 5% during the first
quarter.
"This is as high as we have ever seen, even comparing this cycle
to prior regional home price depressions in the US," the Goldman
analysts wrote. "As a result, we think earnings will remain weak
this year, next year and potentially even in 2011 as banks work
through this credit deterioration."
As for the trust banks sector, which includes Bank of New York
Mellon Corp. (BK), Northern Trust Corp. (NTRS), and State Street
Corp. (STT), Goldman believes revenue declines may have bottomed
last quarter as the stock market gained and securities lending and
currency trading stabilized.
In the credit card sector, which includes Capital One Financial
Corp. (COF), Discover Financial Services (DFS) and American Express
Corp. (AXP), Goldman says that an improvement in seasonal
delinquency trends will give the stocks relief from the pressures
of rising unemployment and changes to federal laws regulating the
credit card industry.
Shares of the trust banks gained in recent trading, with State
Street up the most at $42.60, or a 2.9% gain. Shares of credit card
companies fell or traded sideways, with Discover Financial showing
the largest decline, trading at $8.40, or down 3.2%.
-By Ed Welsch, Dow Jones Newswires; 201-938-5244;
edward.welsch@dowjones.com