Avoid US Banks

Highlighted stocks include Bank of America Corporation (BAC), Citigroup Inc. (C), Comerica Inc. (CMA), Zions Bancorporation (ZION) and Wilmington Trust Corporation (WL).

On Thursday, the US Senate voted to release the second half ($350 billion) of the TARP funds.

While the incoming administration has not so far provided the details of how they will use this money, they have stated the intention to use $50 billion to $100 billion in foreclosure-prevention efforts. It is expected that they will continue to inject capital in the troubled financial institutions and possibly also buy some toxic assets from these institutions.

Further, as there was a lot of criticism of the way the first half of the funds was used, it is now proposed to impose tougher restrictions on banks that receive government aid, which will include lending requirements, restrictions on executive compensation, dividend payments and acquisition activity; as also greater accountability and transparency on the part of the Treasury.

However, with the drama unfolding at Bank of America Corporation and Citigroup Inc., the bigger question that arises now is whether TARP will be enough to save/stabilize the financial system. As the previously bailed out institutions keep coming back to the Treasury to ask for more money, it seems that we may need several rounds of TARPs, until the banking system finally stabilizes.

Housing prices have continued their downward spiral, followed by commercial real estate prices. With the unemployment rate soaring, there are increased losses on other loan portfolios as well. Since the situation is not expected to improve in the near future, we do not anticipate the losses at the banks to reverse their course anytime soon.

Another issue badly affecting investors’ confidence with these institutions is the total lack of transparency so far with the bailout efforts, which became so evident with Bank of America. Both the recent deals made by BAC (i.e., Countrywide and Merrill Lynch) were very expensive by any standards and further, after receiving the TARP money, BAC spent $7 billion to buy a big stake in a Chinese bank. Now taxpayers are being made to bailout these bad deals.

We maintain our negative outlook on the banks and will continue to advise investors to avoid the sector, particularly the banks having large exposure to housing /commercial real estate loans, like Comerica Inc., Zions Bancorporation, and Wilmington Trust Corporation.

Subscribe by RSS Subscribe by Email