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What signs will you be looking for that a real recovery [in banking] is taking place?
Once the bailout program is in place, capital infusion will strengthen the balance sheets, bad assets will be removed from balance sheets and credit will begin to again flow. Also, the Fed is expected to lower interest rates further, which will help the banks with a liability-sensitive balance sheet.
On the negative side, forced dilution resulting from the Government's action and continued credit losses will hurt the shareholders.
Assuming you have banks under coverage worthy of investors' dollars, what types of banks would they be?
We prefer those with low exposure to housing/real estate loans and/or which derive a significant portion of their earnings from fee based sources. Those with higher exposure to housing/residential construction loans, such as KeyCorp (NYSE: KEY), National City (NYSE: NCC), Zions Bancorp (Nasdaq: ZION), Comerica (NYSE: CMA | Quote | Chart | News | PowerRating) and Wilmington Trust (NYSE: WL | Quote | Chart | News | PowerRating) will continue to be under pressure.
With most banks winding up their riskier mortgage loans business (subprime and no documentation loans), the profitability of mortgage business will be significantly lower. Further, as the housing turmoil is affecting the consumers in general, we now see higher losses in other asset classes as well. Tighter lending and underwriting norms will limit the lending activity of the banks and further hurt profitability.
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