Banks are tiptoeing out of the recession's shadow, but it wouldn't take much to send them back.
The banking sector, so key to the well-being of our economy, is on the rebound. Bank stock prices are still below 2007 levels in most cases, but many have returned 100% or more over the past year. I recently checked in with members of Morningstar's banking team --Matt Warren, Jaime Peters, James Sinegal, Erin Davis, Maclovio Pina, and Michael Kon-- to see how the healing process is coming and whether we're out of the woods.
Q: Financial stocks have rallied hard over the past year. How are the fundamentals looking?
A: The mood in the sector has markedly improved from last year. Most importantly, recent data suggest that, after a long and painful climb up, new defaults on mortgages and consumer loans are finally declining. While commercial real estate remains a serious headache for many banks, the improvement in mortgages and consumer loans is likely a harbinger for a turn in the credit cycle. This means that banks with sizable consumer loan books might soon benefit from lower credit costs.
Q: How did bank profits look in the first quarter?
A: J.P. Morgan
Q: What about Citigroup
A: Credit losses remain sky-high at Citigroup, but delinquencies are trending downward, giving hope for the future. Citigroup charged off $8.4 billion of loans this quarter, an annualized run rate of 4.65% on its $722 billion of loans. However, compared with the company's $50 billion in reserves (or 6.8% of total loans), any sign of improvement is likely to allow the company to reduce its provisions going forward, giving a nice boost to earnings later this year.
Overall, Citigroup turned in a decent quarter, given the current economic environment. Capital is strong. (Citi's Tier 1 common ratio stands at a whopping 9.1%.) We expect that earnings will remain in positive territory, barring a double dip in the global economy. However, shares outstanding have gone from roughly 5 billion to 29 billion, leaving no doubts that this crisis and Citigroup's poor management leading into it have permanently damaged shareholders.