Lehman haunts banks cheapest to S&P 500 even as shares surge

Summers Withdrawal

The S&P 500 climbed 0.8% at 10:14 a.m. New York time after Lawrence Summers withdrew from the race to be the next Federal Reserve chairman.

The 81 banks, brokerages and insurers in the S&P 500 have gained 23% in 2013, 4 percentage points more than the full index, after rising 26% last year. Genworth Financial Inc., the Richmond, Virginia-based life insurer, has climbed 63% while its price-earnings ratio expanded 1.4% this year. Charlotte, North Carolina-based Bank of America Corp.’s shares rallied 25% this year on a 2.2% valuation increase, data compiled by Bloomberg show.

Financial firms have almost tripled their earnings in the three years since 2009, rebounding from the first annual net loss since at least 1990 and almost matching the 224% rise in the shares.

The lock-step growth held valuations steady over the last 12 months even as the price-earnings ratio for the S&P 500 widened by 11%, according to data compiled by Bloomberg.

Obstacle Course

Sentiment toward bank stocks failed to improve after chief executive officers were forced to rebuild reserves in 2010 and contend with Europe’s sovereign debt crisis a year later. While the shares are up 24% the last 12 months thanks to earnings gains, valuations are unchanged as the U.S. Fed prepares to curtail bond purchases at the same time that new regulations require the companies reduce some of their most profitable, and most risky, businesses.

“It is an unstable industry for anyone looking for a steady income stream,” Andrew Hadley-Grave, investment managers at Fleming Family & Partners Ltd. in London, which oversees $6 billion, said in an interview on Sept. 12. “Our strategy is such that we don’t need to own them if we don’t like them, so we are staying away,” he said. “You can outperform the market without owning financials.”

Bank stocks bore the brunt of the credit crisis, with the S&P 500 Financials Index plunging 83% between October 2007 and March 2009, almost 1 1/2 times the full gauge. The drop included declines of 23% in October 2008 and 27% in January 2009, data compiled by Bloomberg show.

Record Drops

The 10.6% plunge on Sept. 15, 2008, was the biggest one-day calamity in the financial index’s history. It was eclipsed by a 16.1% retreat on Sept. 29, in a month when Lehman Brothers collapsed, Merrill Lynch & Co. and Wachovia Corp. were rescued by sales, American International Group Inc., Fannie Mae and Freddie Mac were bailed out by the government and Washington Mutual Inc. declared bankruptcy.

Almost $11 trillion of U.S. equity value was erased from peak to trough, including more than $2.4 trillion from banks.

Policy makers have spent the last five years setting rules to rein in risk-taking and reduce financial leverage. The 2010 Dodd-Frank Act, the biggest overhaul of market regulation since the Great Depression, and other rules require banks to curb trading for their own accounts, double capital for the biggest firms and use clearinghouses for derivatives trades.

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