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Money in the Bank: How to Find Opportunities in a Fallen Sector

by John Deysher

Money In The Bank: How To Find Opportunities In A Fallen Sector Splash image

In the past year or so, bank stock prices have fallen sharply, reflecting a negative shift in sector prospects.

Since summer 2007, the Value Line Bank Index is down 25% and the Thrift Index is down 30%. Some banks have reduced or eliminated their dividends, a sure sign of stress. The causes include:

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John Deysher is president and portfolio manager of the Pinnacle Value Fund, a diversified, SEC-registered mutual fund specializing in the securities of small and micro-cap firms. He is a CFA charterholder and has managed equity portfolios for over 25 years. He lives and works in New York City and may be reached at deysher@pinnaclevaluefund.com.
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Declining loan quality. Non-performing assets and loan charge-offs are rising across most loan categories—real estate/home equity loans, credit cards, highly leveraged transactions and others. At year-end 2007, about 1.4% of all loans were delinquent, according to the FDIC. That’s the highest level since 1992, but still below the 2% level reached in 1990–91.

Net interest income is down. Banks are tightening credit standards and lending terms and making fewer loans. Consumer and business confidence is the lowest in years, resulting in lower loan demand.

Fee income is also down. Fewer loans means less fees, and a reduced securitization market inhibits banks’ ability to flip new loans to the secondary market for a gain.

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→ John Deysher is president and portfolio manager of the Pinnacle Value Fund, a diversified, SEC-registered mutual fund specializing in the securities of small and micro-cap firms. He is a CFA charterholder and has managed equity portfolios for over 25 years. He lives and works in New York City and may be reached at deysher@pinnaclevaluefund.com.