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Why the Bank Sector Is Back in Business


Anticipate delayed reaction buying followed by strong share performance.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

It's banks EPS central this morning. Broadly speaking I expect we'll continue to see a somewhat muted and/or negative reaction to most of the initial EPS results. However, I also expect this to be shortly followed (within days to weeks) with delayed reaction buying for most of the top-quality banks, which results in strong share performance.

If you look at this sector, the EPS growth -- it's simply tremendous, the balance sheets (which were never as dire as most pundits feared) are healing up by the week. Once credit-loss charges peak, which should happen in the second half of 2010 or earlier, there will be another round of EPS revisions

As for specific reports:

Bank of America (BAC) -- lots of moving parts and the report wasn't stellar but I think it was good enough and I'm a buyer on any sell-off more than $0.50.

State Street (STT) -- very good report. I've added recently into weakness as posted and I think this asset-management- and custodial-driven bank is selling far too cheaply. In fact, I think these shares have some of the best upside among higher share-priced banks currently.

Northern Trust (NTRS) -- similar to State Street, another very good report and I think the shares have a lot of upside due to EPS as well as dividend growth.

Wells Fargo (WFC) -- may be the best report so far out of the blue-chip banks. Revenues beat and EPS production was strong even with credit losses. Again, as I postulated nearly a year ago, these banks are indeed "earning-out" their losses.

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Position in BAC, STT, NTRS

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