Money in the Bank: How to Find Opportunities in a Fallen Sector
by John Deysher
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:
In this article
- How to Case a Bank
- Quantitative Factors
- Capital Ratios
- Non-Qualitative Factors
- Banking on Bank Stocks
- Casing a Bank: Key Ratios and Other Factors
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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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