Is it time to buy bank stocks?
Posted on November 20, 2007 in the Investing, Stocks category
.Last week Barrons has a whole page dedicated to why Citigroup was a good long-term buy at its current level. Part of the reason for Barron’s bullish position was that Citigroup now sells for just seven times cash flow and eight times estimated 2008 earnings.
After writing off $11 billion in bad loans Barron’s believes that Citigroup is a good long-term bet and that while the stock might fall a bit further it could got to $60 within a few years.
But things are not all rosy for Citigroup or the bank sector in general. Just this past week Bear Stearns announced it would take a $1.2 billion write down related to bad debt. Bank of America said it would write off $3 billion in bad debt, while Barclay’s Group announced a $2.7 billion write down related to subprime debt.
So why should investors care about these write offs? One reason is that I don’t think that we have seen the end of them. Banks and financial institutions still have a lot of loans that are illiquid. At some point they will have to mark them to their current market worth, that will result in more write offs.
The big issue with all these write offs is the impact that they are having on bank’s capital ratios. As the write offs reduce the capital ratio, then banks will be forced to raise cash. Two ways to do this are to sell of parts of the business or to cut the dividend.
While Citigroup might well hit $60 a share, I think it will fall into the twenties first. The troubles in the housing market are not over and neither are the sub-prime loan problems. Look for these problems to carry over into the first quarter of next year and for bank stocks to be under pressure until Q2 2008.
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