Bank profit leading S&P 500 as U.S. earnings growth sputters

As third-quarter earnings season begins, the companies analysts are most bullish about are the ones whose stock prices are farthest below their highs -- banks.

While financial institutions in the Standard & Poor’s 500 Index climbed 24 percent in 2012 for the biggest rally in nine years, they remain 58 percent below the record of February 2007, according to data compiled by Bloomberg. Signs of a housing recovery prompted Wall Street firms to raise estimates for profit growth to 21 percent for the third quarter and 32 percent in the fourth, the most of 10 S&P 500 industries.

Bulls say banks will continue to rally as Federal Reserve stimulus boosts earnings and helps companies from BB&T Corp. to KeyCorp and Wells Fargo & Co. rebound from the 84 percent drop during the financial crisis. Bears say gains will be limited to traditional lenders and increased regulation will drag down firms that depend on trading and underwriting for revenue.

“As transactional volume increases for consumer, housing and business credit, there is an opportunity to increase earnings” among regional lenders, said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which oversees $3 billion. Firms outside of the “purer banking model” face too much regulation, he said in an Oct. 3 e-mail.

Loans Down

Almost five years after the stock market high, real-estate loans among 7,246 federally insured banks have fallen to $4.09 trillion from the record $4.81 trillion reached in 2008, Federal Deposit Insurance Corporation data shows. After declining for 14 consecutive quarters, lending expanded 0.4 percent during the last three months of 2011 and less than 0.1 percent between March and June of this year.

Financial companies still haven’t recovered to pre-crisis levels, with revenue per share at less than half the amount in 2007, according to data compiled by Bloomberg. Tighter rules that limit firms’ trading and call for higher capital requirements and new home sales 70 percent below their record are weighing on investor sentiment.

While banks, brokers and insurers gained 158 percent since equity markets bottomed in March 2009, leading the S&P 500, it would take a rally three times as large to get back to the all- time high. More than $2.4 trillion was erased from the S&P 500 Financials Index’s value from February 2007 to March 2009, as lending froze and writedowns and losses related to subprime mortgages climbed to $2.1 trillion globally.

The S&P 500 fell 0.5 percent to 1,454.05 at 9:38 a.m. New York time, with financial shares slipping 0.4 percent.

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